Why choose NPS for your retirement portfolio?

New Delhi: Social media has become very popular these days. Especially Millennials and GenZ youth are relying on social media influencers to make their daily life decisions. This happens with finance too. Especially people from smaller towns and cities are relying on finance influencers for their financial decisions.

But the point here is how much shall they trust the knowledge shared by the finance influencers. Finance influencers may be suitable for financial awareness but can’t be relied on for financial decisions. These influencers majorly promote stock markets and mutual fund schemes. At the same time, there are certain government schemes like NPS which are very affordable and give assured returns.

NPS makes your retirement planning very easy. Just by contributing a small amount every month, you can save for your retirement. Everyone must have NPS in their retirement portfolio. In this article, we will discuss in detail why shall you choose NPS for your retirement portfolio.

Before we get into why NPS shall be chosen for retirement, let us first understand what is NPS.

What is NPS?

NPS stands for National Pension Scheme. It is a social security initiative by the Government of India. Any employee of public, private, and unorganised sectors (except armed forces) can invest in the NPS scheme. The age of the applicant must be between 18 to 70 years when opening an NPS account.

One can contribute a small amount every month to get the benefit of the scheme post-retirement. After retirement, the subscriber of the scheme can withdraw a certain percentage of the corpus. You will get a pension for the remaining amount.

Whether you change the job or location, the scheme will continue and won’t have any effect. In addition to this, it also has tax benefits.

Top Reasons for Choosing NPS for Retirement Planning

NPS is a very good investment option for a retirement portfolio. Let us understand why choose NPS for retirement planning.

1. Good Returns

Some portion of NPS funds is invested in equities. They may not give you guaranteed returns. But NPS as an overall scheme offers you good returns. And these returns are quite higher when compared to other investment options like fixed deposits, PPF, etc.

After you retire you can withdraw a certain amount of corpus. And the remaining amount you will be receiving as a pension every month for a lifetime. You can calculate the returns of your NPS investments online using a NPS calculator.

2. Flexibility

NPS is a very flexible scheme. You have the option to choose the assets in which you want your funds to be invested. There are four asset classes available and you can divide your money as per your risk-taking capacity. If the allocation is not giving the desired result, then you can also rearrange these funds at any point in time.

The funds in this NPS are managed by fund managers. If you are not happy with the result given by your fund manager, you can change your fund manager. You can choose from seven different fund managers.

3. Very Affordable

The scheme is very affordable. You can open the NPS account with a minimum deposit of ₹500. And after that, you just need to contribute a minimum of ₹1000 in a year. It is a voluntary scheme so you can increase and decrease your contribution as per your income.

4. Low Risk

NPS has a very low risk as compared to other investment options. Moreover, as it’s a government scheme, the risk cap on the stocks ranges from 50% to 75%. For govt employees and other employees above 60 years of age, the risk is capped at 50%.

On the other hand, for investors who are either 50 years or below 50 years of age, the risk exposure is 75%. On crossing the age of 50 years, this exposure decreases by 2.5% each year till the investor reaches the age of 60 years.

What is the use of NPS if I already have PF?

The working class in India have to contribute to PF as per the employment provision. But PF contribution is not enough. It’s a very small amount. The pension you receive through PF will be a very small amount and will not be sufficient for you to survive your life after retirement.

So along with PF contribution, it's advisable that you also invest a bit in NPS. NPS gives you the option to choose among different pension fund schemes. These schemes act like a pension only. This means that you can withdraw the amount only after you have reached 60 years of age.

In NPS after retirement, you can withdraw a certain percentage of the corpus amount. But the remaining amount would be used to serve you the pension every month. So, it’s advisable to have an NPS account along with PF.

Conclusion

If you are planning for retirement then NPS is a very good option. It gives assured returns as well as carries less risk. Moreover, it is also very affordable so can be opted for by everyone. You can also use the NPS calculator to calculate the maturity amount of the scheme.

Frequently Asked Questions

1. Is NPS better than other pension plans?

NPS is a very affordable scheme compared to other annuity plans. You can start investing in it with a very small amount. Moreover, NPS comes with income tax benefits and is a government-backed scheme. So, there is social security attached to this scheme.

2. Should I invest in NPS monthly or yearly?

If you want to have a steady income after retirement, it’s advisable that you invest in NPS every month throughout your employment tenure. By investing monthly, you can create a huge corpus which will help you to get a good amount of pension after retirement.

3. Does NPS have a lock-in period?

NPS comes with a lock-in period of 3 years. Tax-free partial withdrawal is allowed in NPS after 3 years. And a maximum of 25% of the amount invested can be withdrawn.

4. Is NPS a risk-free investment?

NPS is a government-owned social security scheme targeting employees of private, public and organised sectors. So, it is less risky as compared to other retirement options.