Consistency should be key criterion when choosing NPS fund manager

Asset allocation to NPS should depend on age, risk appetite and asset mix in existing investments

In September 2022, the number of individual subscribers to the All-Citizens model of the National Pension System (NPS) stood at 25.04 lakh, up 36 per cent year-on-year, according to data from the Pension Fund Regulatory and Development Authority (PFRDA). Investors must make prudent choices at the time of joining NPS.

Is NPS for you?

Investors looking for a dedicated retirement product, where their money can't be easily withdrawn, may consider NPS. “It is a cost-effective retirement product that also comes with tax benefits,” says Sumit Shukla, managing director and chief executive officer, Axis Pension Fund Management.

Investors get a tax deduction of Rs 50,000, which is exclusive to NPS, under Section 80CCD(1B).

Unlike mutual funds, NPS also offers tax-free rebalancing.

Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA) applies three criteria before suggesting NPS to a client. “The subscriber should be in the 30 per cent or higher tax bracket. An investment in NPS should not crowd out his other investments. And he should not need the money till 60,” he says.

A goal like retirement requires multiple products and a mix of asset classes (equity and debt). “Employees Provident Fund (EPF) and Public Provident Fund (PPF) are debt-oriented products that will barely beat inflation over the long term. If you are looking for equity exposure, then besides mutual funds and direct equities, you may also opt for a specialised retirement product like NPS,” says Arnav Pandya, founder, Moneyeduschool.

Get asset allocation right

Asset allocation in NPS should be decided based on risk appetite and age. “A very risk-averse investor may opt for 100 per cent allocation to debt. On the other hand, one who has the required risk appetite may invest in equities up to 75 per cent. The other factor is age. Younger investors should have a higher allocation to equities while those closer to retirement should have a higher allocation to debt,” says Shukla.

NPS is usually one product among many that investors have in their retirement portfolios. Says Pandya: “The asset allocation within NPS should also depend on the cumulative equity-debt mix of the other products you have in your retirement portfolio.”

Active choice for greater control

An individual who understands investing and wants greater control over his asset mix should opt for active choice. “This option allows you the flexibility to decide how your contributions are to be invested in these asset classes: equity (E), corporate debt (C), government securities (G) and alternative assets (A),” says Sreekanth Nadella, managing director and chief executive officer, KFintech.

Active choice investors can take an exposure of up to 75 per cent in equities and keep it at that level till age 50. After that the equity exposure starts tapering and declines to 50 per cent by age 60.

Investors who don’t have the time, knowledge or inclination to manage their investments should opt for auto choice. Here, an investor may choose from one of three life cycle (LC) funds: aggressive (LC75), moderate (LC50) and conservative (LC25). In LC 75, the equity exposure is 75 per cent at age 35 and falls to 15 per cent by age 55. In LC 50, it moves from 50 per cent at age 35 to 10 per cent at age 55. And in LC 25, it declines from 25 per cent at age 35 to 5 per cent at age 55.

“In life cycle funds, investors don’t have to worry about reducing their equity exposure as they age. The risk attached to their investments reduces automatically,” says Amit Sinha, group head–social security & welfare, Protean eGov Technologies.

Nadella suggests that the choice between the three life cycle funds should depend on the investor’s risk appetite.

Sinha adds that novice investors may begin their journey with the auto-choice option, experience NPS, and shift to active choice later.

Choose a consistent PFM

Investors can’t have separate pension fund managers (PFMs) for equity and debt. “Go for a PFM whose performance has been consistent both on the equity and the debt side,” says Pandya.

Return-of-premium annuity offers lower payout

•  If the equity market is at a low point when you retire, or you decide to extend your work life beyond 60, you can continue to hold your corpus in NPS — till the maximum age of 75
•  At withdrawal upon retirement, 60 per cent of your corpus will be given lump-sum with no tax being levied; balance 40 per cent must be annuitised (annuity payouts are taxable at slab rate)
•  When buying an annuity, you must decide whether you want annuity payments only for your lifetime, or also for your spouse’s lifetime
•  You will also have to decide whether you want the premium returned to your nominee upon your or spouse’s demise
•  The annuity payout rate is lower in the return-of-premium option