Balanced funds make more sense for long-term investors willing to take higher risk for better return...
27-May-2013 •Research Desk
I am planning my retirement and have considered investing in NPS and funds like HDFC Prudence and ICICI Pru Equity Volatility Advantage Regular. NPS has equity exposure, but hasn't performed like balanced or hybrid funds. Which of these will be a better investment option for 20 years?
To help you choose between the two, we have compared all features of both, balanced funds and National Pension Scheme (NPS). NPS is a voluntary pension scheme in operation since 2008. Unlike conventional retirement options like PPF or EPF, investments in NPS are exposed to equity and come at a very low cost.
Balanced funds are open-ended schemes that allow you to withdraw investments anytime, but NPS has restricted withdrawals. In NPS, one can withdraw only 20 per cent of the investment before 60-years of age and 60 per cent between 60 and 70 years of age. The remaining amount has to be invested in an annuity.
NPS cannot invest more than 50 per cent in equity, while balanced funds have a minimum 65 per cent equity exposure which goes up to 80 per cent. Although in both, NPS and balanced funds, the fund manager does the automatic rebalancing which locks in equity gains into debt.
Investors in NPS can choose between active choice individual funds (equity- E, debt securities other than government- C and government securities- G asset class) and an auto choice- lifecycle fund. Hence, investments can be made into various asset classes (E, C or G) based on the risk appetite and return expectation of the individual. However, when the investor turns 36-years old, the allocation in E and C asset class will decrease annually and increase for the G asset class till it reaches 10 per cent in E, 10 per cent in C and 80 per cent in G class at age 55. No, such option is available with a balanced fund. It will have exposure to equity and debt within its mandated limits and will be same for all investors.
Balanced funds are hybrid products that invest predominantly (70-80 per cent) in equity. These are actively managed and have no restrictions in terms of sectors or stocks. These funds provide a ready made portfolio to a beginner in mutual fund investments. Although a higher exposure to equity makes balanced funds a riskier option over NPS, but these funds have rewarded investors over long-term.
NPS scores higher than balanced funds in terms of cost as its expense limit is 0.25 per cent per annum. Although there are other fees like the first time registration charge of Rs 100 and annual charges of Rs 350 but it is still the cheapest option. The expense ratio of balanced funds range from 1.40 to 3.15 per cent at present.
In terms of performance, three years is too short a period to comment on a pension scheme where everybody invests for a considerably long period. In the past three years markets have been range bound. Till now these funds have delivered between 5-8 per cent over a three-year period.
Balanced funds have a long track record and also provides more choices. Over the past 15 years the average return delivered by this category of funds is 18 per cent.
Investments in NPS get a tax deduction under section 80C but the withdrawal from NPS is taxable. While there is no such exemption in case of balanced funds, you pay tax on your income and after that you make an investment in a balanced fund therefore it is a post-tax investment. However, the gains from balanced after one year become tax-free as there is no long-term tax on equities.
In conclusion, NPS outweighs balanced funds for its low cost and tax exemption. If you aren't worried about saving taxes, then balanced funds make more sense for long-term investors willing to take higher risk for better returns.