Understanding NPS

It always necessary to have a cash flow even after retirement, making investments which will bear fruits is thus very important. Pensions are a way of having cash flow post retirement. National Pension Scheme (NPS) is a scheme started by the Central Government which is meant to provide pensions to elder citizen or the senior citizens of the nation post retirement.  NPS has gathered a massive 1.34 crore subscribers, last checked in May, 2020. It has grown to be one of the most widely used tools of saving money for pension with more than Rs. 4.5 lakh crore assets under management. NPS has 3 investment options namely: 1) Equity Fund; 2) Corporate Bond Fund; 3) Government Security Fund. The investors can divide their investment in these categories depending upon their preferences.

How have the funds performed?

Most investors choose equity as they have a reputation of delivering more profits than the other options. But the recent fall in the equity market of nearly 38% has shaken this confidence of the investors. Equity funds have impacted the short term returns as majority of the equity funds have been giving negative returns on short term basis. Despite this equity funds have given more than 8% returns over a period of 10 years. Four of these seven funds under NPS have a track record of over 10 years. Equity Funds such as UTI Retirement Solutions, ICICI Prudential Pension Fund Management, etc. have given returns of nearly 8.5%.

Nearly 25% or more of the investments must be made to Bond funds (corporate or Government) but investors have preferred to invest more than that in the bond funds. These people stand to benefit from their decision as the bond funds have done very well and have given lots of returns. A reason for their success is the falling interest rates. Bond funds have provided returns and saved investors their moneys when equity failed to provide any returns. Bond Funds such as ICICI Prudential Pension Fund Management amongst others have provided nearly 10.6% returns in the last 10 year segment in corporate or government bond fund sector whereas bond funds like Birla Sun Life Pension Management Fund have provided returns at 14.2% in just one-year segment. However, if predictions are to be believed, it will be very difficult for the bond funds to repeat such performance again.

How should one invest?

The ups and downs of the market have been very volatile and it makes choosing investment options very difficult. It is always better to divert your investments in many regions to reduce the risk. Diverting investment will attract lesser risk and increases chances of increased returns. If people are subscribers of the NPS and have more than 10 years till retirement and are willing to take risks, then they must take this chance to invest as predictions stated that this could be a good chance to invest to increase their returns especially when the equities are doing so well in the current market scenario.