I am 26 years old, working in a multinational company. I came to know about the New Pension Scheme (NPS) that will be launched for the unorganised sector. Can you tell me about the features of this scheme.
- Pushpendra Singh
NPS is a pension system meant for individuals working in private companies. It was launched on May 1, 2009. It offers a way by which any individual can save for retirement. NPS is not just meant for private individuals, but is also applicable to all central government employees who joined service after January 2004.
NPS contributions will be made on the basis of a defined contribution. The record keeper will be the National Security Depository Limited, while six fund managers will run different investment plans, such as equity and G-Secs. Investors can opt for any of these asset classes according to their requirement.
In case an investor is unable or unwilling to exercise any choice with regard to asset allocation, his contribution will be invested in accordance with the ‘Auto Choice’ option, where the investment will be determined by a pre-defined portfolio.
What’s so great about NPS? It’s shockingly low cost. While the annual cost of record-keeping is Rs 350, each transaction will cost Rs 20. The investment management fee is also very low at 0.009 per cent per annum. That means, over the long term, the magic of compounding will play a massive role in increasing your nest egg. But, since this is a pension scheme, one cannot withdraw money until 60 years of age, except for critical illnesses or for building/buying one’s house. Even at 60, one can withdraw just 60 per cent of the corpus, while the rest must be used to buy an annuity. But there is one major drawback: The gains will be taxable.
For opening an NPS account, you need to download the form from Pension Fund Regulatory and Development Authority’s (PFRDA’s) website and then contact any of the 22 entities – mostly banks – appointed by PFRDA as Points of Presence (PoPs).
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Is it wise to switch investments from equity diversified funds to debt funds when the equity market is falling?
-Cherry Thapar
No, there is no such relationship between equity and debt funds. Both equity and debt funds are two different investment avenues. The factors affecting these two asset classes are different.
While the performance of equity funds depends on the share market, the performance of debt funds depends primarily on the movement of interest rates.
Since both the asset classes are affected by different factors, both asset classes may not rise or fall together. Therefore, it is always advisable to diversify one’s investments among asset classes.
Can short-term debt funds generate negative returns?
-Rahul Shetye
Yes, short term debt funds can yield negative returns. You can opt for liquid funds for short-term investments. They are relatively safer than other debt funds.
Value Research