Mutual Fund Sahi Hai

Investors' Hangout: Top five reasons to invest in NPS

Dhirendra Kumar, a member of the pension advisory committee of PFRDA, is here to explain why NPS is a valuable option for retirement planning

What is NPS and how has it evolved over the years?

It was created for government employees. They were entitled to something called a defined benefit system. It ensured a fixed pension linked to their last salary, adjusted for inflation.

There was a defined contribution system which was initiated from the year 2004. All government employees who came on board from April 1, 2004, the National Pension System was initiated for them. Here, the government employees contributed 10 per cent of their salary, which was matched by the government. These contributions were invested in pension plans, accumulating over the employees' careers until they retired.

What are the auto choice and the active choice options in NPS?

NPS offers two investment options: auto choice and active choice. Auto choice includes aggressive, moderate, and conservative lifecycle plans. This approach adjusts asset allocation based on the investor's age, shifting towards fixed income as retirement nears. In contrast, active choice allows investors to allocate up to 75 per cent of their funds into equity. For those comfortable with market fluctuations, this option can yield substantial long-term rewards.

Now, there is also a systematic lump sum withdrawal facility in NPS. Investors can also now choose different pension fund managers for different asset classes.

Come to Value Research Online where we have comprehensive performance data for all the pension funds.

What are the top five benefits of investing in NPS for retirement?

  1. Restricted withdrawals: NPS ensures long-term savings by limiting premature withdrawals.
  2. Low cost: NPS offers low-cost asset management, making it economical.
  3. Tax benefits: Private sector employees can benefit from tax-free employer contributions. This is over and above the Rs 1.5 lakh tax deduction under Section 80C of the Income Tax Act.
  4. Tax-free transfers: Moving funds between equity and debt within NPS is tax-neutral.
  5. Long-term investment pool: NPS's long-term investment nature allows fund managers to take a stable, long-term view, minimising disruptions from short-term market movements.

Viewers' question:

  • Is NPS useful for those nearing retirement?
    Purnima Singh asks, "Is NPS also useful for those who have 10 years left for retirement?"
    Yes. NPS's low cost and forced investment structure make it a great option for disciplined saving. Ten years is ample time to accumulate significant savings.
  • When to invest in a NASDAQ 100 index fund?
    Harsh asks, "What is a good time to invest in a NASDAQ 100 index fund, i.e., before or after the Fed interest rate cut or any other criteria?"
    You should invest in NASDAQ 100 for the next 10-15 years anyway. The key is long-term commitment. NASDAQ 100 comprises advanced technology companies, offering unique investment opportunities not available in the Indian market. Interest rate changes or market fluctuations should not deter long-term investments. Plan your investments and consider systematic investment plans (SIPs) in a vehicle that allows you to invest in NASDAQ 100.

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