National Pension Schemes – The favourite retirement product in 2021

The equities market’s near-peak performance has benefited greatly the National Pension System’s (NPS) equity scheme, Scheme E. The government’s pension scheme has performed admirably, with equity funds earning double-digit returns of up to 60% over the last year. LIC Pension Fund earned the greatest returns of 59.56 percent in the Tier 1 Account of the NPS, followed by ICICI Pru Pension Fund (59.47 percent) and UTI Retirement Solutions (58.91 percent).

But if NPS the only way to go? There is no single optimum strategy – rather, there is a need for an effective inflation-protected portfolio that can function in a shifting investing environment. Such a portfolio will have an appropriate allocation to both equities and fixed income in order to outperform inflation and provide stability consistent with the risk profile and needs of the investor.

Saving for retirement is, first and foremost, a lifelong endeavour. Before you begin creating your nest egg, you should determine how much money you will require post-retirement. Additionally, you should re-evaluate this at frequent intervals to account for changes in your lifestyle over time.

NPS has grown in popularity over the last few years as a result of the strong returns created by the scheme. However, experts say that profits should not be the only factor in determining whether to invest in NPS. Unlike mutual funds, NPS does not offer investors a great deal of investment and redemption freedom.

A Tier 1 NPS account is the minimum retirement account required to get NPS benefits. The returns on NPS equity funds are comparable to those on benchmark funds. Equity schemes in the Tier II Account of the NPS, which is an add-on account that enables investors to invest in and withdraw from the various NPS schemes without incurring an exit load. Tier I NPS accounts are locked in until you reach the age of 60 unless you extend them, however Tier II accounts do not have a lock-in term.

“You cannot retrieve your full investment in an NPS before completing at least ten years or attaining the age of sixty. Additionally, the maximum equity exposure in NPS is limited to 75% of your entire investment in NPS” – Krishna Rath, SEBI Registered Investor Adviser and founder of This limits the possibility for long-term development for investors with an aggressive risk tolerance and a long investment horizon.

Historically, we have seen that over extended periods of 10-15-20 years, equity assets are the most effective way to generate wealth, and with retirement for many as long term financial goals, equity exposure is a must in one’s portfolio.

NPS, on the other hand, is an excellent investment for conservative to moderate investors. Additionally, NPS offers some tax advantages that are not available to other investment vehicles. It entitles you to a larger tax deduction of up to Rs 2 lakh under Sec 80C, as opposed to Rs 1.5 lakh for mutual fund ELSS plans. Another advantage is that you can withdraw up to 60% of your whole corpus tax-free at maturity.

Thus, people seeking to maximise their tax benefits may invest an additional Rs 50,000 in NPS after deducting Rs 1.50 lakh in other acceptable investment and expenditure alternatives under Section 80C.

When it comes to retirement planning, NPS can be only of the several products. The key is the financial objective based on several factors including expected future expenditure.

Once you’ve established this financial objective, you can consider asset allocation – which will vary according to your age and life stage. For instance, if you’re between the ages of 35 and 45, Mehta notes, you can invest 60% of your money to equity funds and 40% to debt funds. Exposure to equity is typically necessary for retirement savings since it enables you to outperform inflation over the long run. Inflation, in our opinion, is your primary issue while saving for retirement. As you approach retirement, your asset allocation should ideally shift to mitigate the impact of market volatility on your retirement corpus.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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