I have been investing in the NPS for the past 3-4 years. I haven’t seen a lot of growth in this investment. Can I invest for my retirement through mutual funds, instead of the NPS?
The National Pension System has been devised in such a way that it doesn’t have a high exposure to equities. Even the most aggressive plan of the NPS has invested only about 50 per cent in equities.
When investing for retirement, there are two concerns -- risk & returns and taxation. The money you invest in the NPS, is tax-free. When you invest in a regular equity fund, you will not such a tax break. However, your long-term returns from equity are tax free. But the returns earned from the NPS, on redemption, won’t be tax free.
The other concern is, the kind of risk you can bear. The NPS is a lot more conservative than equity funds, or even balanced funds. Your investments in an aggressive equity fund will also not show you good returns in 3-4 years, in fact they could even depreciate in this time.
For any investment to deliver its full potential returns, one has to look at it over a full cycle of ups and downs it might go through. In equity, the last four years is nowhere near that.
Hence, the way you plan your retirement entirely depends on how much tax you're able to save and the kind of volatility you can handle.