Retirement planning is an important part of your personal money management and with all the investment options available it can get confusing. The National Pension Scheme (NPS) under the aegis of the PFRDA, the pension regulatory authority in India has made a niche in this segment and some even refer to it as the mutual fund for retirement.
However, do not confuse mutual fund investments with the NPS scheme and while the latter does have its unique advantages, it helps to analyse how mutual funds compare as a choice for building your retirement kitty.
Unique to NPS but missing from mutual funds
In structure NPS is similar to a mutual fund scheme; both pool assets from a number of investors and assign or allot units as investment value in a fund. The money which is collected gets invested in assets as per the allocation mentioned for a particular scheme. This portfolio is then managed actively by a fund manager who endeavours to grow your money over time and give a reasonable inflation plus return in the long term.
However, NPS does have the provision to give you a higher tax deduction of up to Rs 2 lakh under sec 80 C as compared to Rs 1.5 lakh for ELSS schemes offered by mutual funds. In NPS, the advantage is that you can take a maximum of 60% of the total corpus out as a lump sum at maturity and 40% of this is exempt from tax.
The remaining amount is to be invested in an annuity which gives you a regular income for the rest of your life and this amount too is exempt from tax, even though the income you receive from the annuity will get taxed at your applicable income tax rate.
Hence, there are greater tax benefits in NPS as compared to equity mutual funds where long term gains are taxed at 10% on withdrawal.
Moreover, at 0.1% management fees, NPS is the lowest cost managed fund you can invest in for your retirement.
The Tier I NPS investment, which is mandatory to open an NPS account has a restriction on withdrawals. You cannot redeem your money before completing at least 10 years or reaching 60 years. Hence, you don’t have flexibility in your investment.
Where NPS gets left behind
The Tier I NPS investment, which is mandatory to open an NPS account has a restriction on withdrawals. You cannot redeem your entire investment before completing at least 10 years or reaching 60 years. You can though, make partial withdrawals for very specific reasons, subject to a 25% upper limit (of the subscriber's total contributions). Hence, you don’t have flexibility in your investment. Investment in equity, through NPS, is restricted to 75% of your total money invested in NPS.
This means, you cannot choose to invest in such a way that your corpus is only invested in long term equity assets, you will mandatorily need to have some fixed income exposure too. This restricts long term returns; over long periods of 10-15-20 years, equity assets work best in delivering efficient inflation plus growth.
The mutual fund industry also has the advantage of having patronage from the most experienced fund managers when it comes to actively managed funds. This advantage is passed on to investors by way of consistent long-term growth.
Despite the tax benefits, a fully taxed annuity income is also a dampener. Moreover, you will not be able to switch the annuity service provider and will necessarily have to opt for an annuity with the NPS manager.
Equity mutual funds whether in the tax-saving ELSS avatar or otherwise award you a lot more flexibility in terms of choosing options, schemes and investment time horizon; use this flexibility to build the retirement corpus that suits you best.