NPS has become more than just a pension scheme but a transformative tool that empowers individuals to pave the way for their dream retirement.
Planning for a secure retirement in today’s dynamic world and rapidly evolving financial landscape is critical. As awareness grows around retirement planning, more individuals are taking charge of their financial future by starting to invest early to build a large corpus. The National Pension System (NPS) has become a popular option among investors looking to create a substantial pension corpus for retirement by contributing during their working years. In the last ten years, the assets managed by the NPS grew by an impressive almost 30 times to reach ₹ 8,62,997 crore, which is a CAGR of 40%.
However, successful retirement planning within the NPS requires a well-thought-out strategic approach that navigates market volatility and uncertainty while ensuring steady wealth growth. To capitalise on NPS investments and ensure long-term viability, it is essential to understand the various investment options and safeguards offered to NPS subscribers, allowing them to align their investment strategy with individual priorities.
While the Pension Fund Manager manages investments made by NPS account holders based on the approach selected, there are a few guiding principles investors should keep in mind to achieve stable returns in the long run.
Diversify your portfolio
One key principle to achieving stable returns in the long run is to diversify your investments across different asset classes and fund managers within the NPS. NPS allows subscribers to allocate investments across Equity (E), Corporate Bonds (C), Government Securities (G), and Alternate Investment Funds (A). By diversifying across different asset classes, investors can reduce the impact of poor performance in any single class and ensure portfolio stability during market downturns. Ensure that your portfolio aligns with your risk tolerance and investment horizons.
Review Performance and Asset Allocation
Analyze the historical performance of the funds under the NPS. Assess the asset allocation strategy of each fund and evaluate its suitability for your investment needs. It’s pivotal to consider long-term performance rather than short-term fluctuations. Simultaneously assess how the NPS scheme fits into one’s overall retirement planning, evaluate the cost and charges associated with the NPS and compare them with other investment options to make informed decision.
Have a long-term investment horizon
Investors can implement a systematic investment plan which allows them to contribute regularly to the NPS account, mitigating the impact of market fluctuations through rupee cost averaging. This approach is useful, especially for investors who are looking at a longer time frame. Implementing SIP over a long period of time enables investors to benefit from the power of compounding and ride out short-term market fluctuations.
Evaluate Tax benefits
As an investor, one can avail tax benefits under the NPS, specifically under sections 80C and 80CCD of the Income Tax provisions. Understand the eligibility criteria and the maximum tax deductions limits applicable to investments.
Regular portfolio review and seeking professional advice
Regularly reviewing the NPS portfolio and seeking professional advice are other essential aspects of successful retirement planning. By periodically reviewing & rebalancing the portfolio, investors can ensure their investments remain aligned with their financial objectives. One should always stay informed about the economic and market conditions that may impact on your investment returns. This practice optimizes gains and manages risk, enabling one to make informed decisions based on risk tolerance and prevailing market conditions. Consulting a financial advisor can be beneficial, as it helps develop a more robust and personalized strategy that aligns with the market conditions and individual goals.
Auto vs Active Investing
When investing in NPS, subscribers can choose between Active and Auto options, depending on the degree of control they want in managing their asset allocation. In the auto choice option, the portfolio of the investor is revised as per the age of the subscriber. As the subscriber grows older, the percentage allocation in equity is reduced and correspondingly the percentage allocation in Corporate and the Government is increased. This ensures that the subscriber risk is reduced in the later years.
This is the default option under NPS and wherein the management of investment of funds is done automatically based on the age profile of the subscriber.
Safeguards to ensure a balanced strategy
NPS offers flexibility to investors, allowing them to protect their investments from market fluctuations and volatility in the macro environment. Subscribers can change fund managers once a year, enabling them to align their investments with a manager whose approach resonates with their financial goals. Additionally, under Auto Choice, NPS subscribers can switch between Life Cycle Funds such as LC75, LC50, and LC25, allowing investors to choose between aggressive, moderate or conservative investment approaches based on risk tolerance and age change. This ensures that the investment strategy evolves with the changing priorities of an investor.
Framework
NPS investments are governed by a strong regulatory framework and monitored by the Pension Fund Regulatory and Development Authority. This regulatory oversight ensures transparency and a balance between risk and reward. The objective of this regulator is to promote old-age income security by establishing, developing and regulating pension funds to protect the interests of the subscribers of pension funds and for matters connected therewith or incidental thereto.
With the support of a robust regulatory framework and ecosystem players, NPS continues to revolutionize the financial landscape and has become a preferred choice for retirement planning for millions of Indians. NPS has become more than just a pension scheme but a transformative tool that empowers individuals to pave the way for their dream retirement. With NPS investments becoming fully digital, investors today can easily leverage the power of NPS investments to make their aspirations become reality and secure their financial future against all odds.
(This article is authored by Senthil Gunasekaran, Chief Business Development Officer, KFin Technologies)
