Opinion: Is NPS really the right Retirement investment option as it is made out to be?
Wondering whether to invest in NPS and how to do that? I was in your situation a few days back and in this article, I have summarized what I decided to do. Please have a read and do share what you think of my research.
Before I start with the core of the topic, let me tell you a little about myself. I am an early age investor who had started investing in Mutual Funds within a few months after getting a job. I have a Term Insurance and good Health Insurance as well. I also enjoy testing the investment waters a bit with MFs like sectoral funds and International funds.
The only thing bugging me for a while is, how to plan for my retirement. While my investments were going on quite well for some time, the recent turmoil in the stock market due to COVID-19 has sent me in red. However, I am not yet worried because my investment horizon is quite long and I still made big MF investments in April and continue to do so in May. But, it still made me wonder should I start making a big retirement corpus through much safer debt instruments like VPF and keep on investing in equity but as a top-up only? Then, it brought back an investment vehicle which I have been avoiding till now - NPS. Quite frankly, I don't like the way I will be forced to investment 40% in an annuity after my retirement. However, the current pandemic has had an effect on my mindset and I am not quite averse of Annuity vehicle like I was before.
Tiers in NPS
So, like most other investors, I started researching on how I can get started with NPS. I got to know that there are two tiers:
Tier 1 - The tax saving investment option that comes with a lock-in of your investment till you reach the age of 60. This might not be the retirement age for necessarily all people, especially in the private sector.
Tier 2 - A saving cum investment account where you can debit and credit money at any time.
You have to compulsorily sign up for the Tier 1 while Tier 2 is optional. However, both are managed by authorized Asset Management Companies which charge 0.01% as their Expense Ratio. For those who invest in mutual funds would know that compared to Active Equity mutual funds, this figure is quite low. Direct mutual funds investing in equity charge around 1-2% as the expense ratio. Compared to that, the expense ratio charges in NPS is almost nothing and this can add up to quite a big amount if you do stay invested for the long term.
How to Register for NPS
So, how do you get started? There are 2 ways to register for NPS. One is an Aadhar based offline mode and another is through a POP. Point of Presence Service Providers are financial institutions like Insurances companies, banks, channels like Paytm Money and ET Money that have been authorized by PFRDA to act as intermediaries to help citizens with the whole process of account opening, investment, statements and withdrawals. However, while the Aadhar based account opening is free, investing through POPs can be quite costly for users. POPs are authorized to collect one-time registration fees of Rs.200, after that, they charge you for every investment you make into NPS at 0.25% of the investment amount from the subscriber subject to a minimum of Rs.20 and a maximum of Rs. 25,000. In addition to these charges, PFRDA has added another charge that is called as the Persistency bonus for the POP. Rs.50 is redeemed from your investment units for every year that you invest in NPS and the POP is rewarded for it. So all in all, you can save a lot of money if you register directly at the NDLS portal with Offline Aadhar.
Even if you register through a POP and afterwards do investment through the NPS portal, your POP would still be rewarded in the same manner. So, if you do invest in NPS, do it through the Aadhar Offline route and no way through a POP. But hold on with me for a little more and read what more I have to say below.
Is NPS the right way to invest for your retirement?
Now, the question still holds, should you invest in NPS or not? To answer that, we need a bit more research. A careful look at online resources will tell you that the ones promoting NPS are either POPs themselves or major newspapers that primarily publish about the majority opinion positively. However, go a little sideways and look for opinions from individual experts and you would notice that most don't recommend investing in NPS. Or at least, not the current style of active investing where the Fund Manager gets only 0.01% as expense ration. Before 2015, NPS equity portion was following passive investment strategy (following Nifty index) which was actually working much better than the current investment. All of the NPS Funds are currently underperforming the Nifty 100 Universe. You can check detailed analysis at my favourite Freefincal blog. For those who are stuck with NPS investment because of being Government employees, it is best for them to keep the equity portion in their portfolio as less as possible and for private company employees, it is much better to make your retirement kitty through EPF rather than NPS.
I am not saying that you should avoid equity altogether! That would be an even bigger mistake, but what I am suggesting is to invest your equity part with good quality Mutual funds plans rather than with NPS. Not only do you get your 100% of your money back during retirement, but you can also actually avoid the 10% tax of redemption by slowly shifting your equity corpus to debt as your retirement comes near. You get the freedom to shift funds when you current fund underperforms, you always have the liquidity with you and the best part is that you don't have to forcefully put your money in an Annuity plan which in India give yields that are less than that of a savings account. And if you don't want to keep analysing your equity portfolio every year (though I recommend you do that!), choose an Index fund and invest with the fund house that has the lowest expense ratio. I remember seeing around 0.10% with ICICI's Nifty Index Fund Direct plan. Please feel free to research more since I checked only a few funds.