Advantages and disadvantages of NPS

July 11, 2019

Advantages and disadvantages of NPS

Every investment option has its benefits and drawbacks. It is only after knowing both that an investor can take the right investment decision. If you are planning to invest in National Pension System (NPS), the advantages and disadvantages of the scheme discussed in this post can help you make an informed decision.

The government-backed NPS is one of the top options for investors aiming to build a retirement corpus. The money invested in this voluntary scheme is managed by Pension Fund Regulatory and Development Authority (PFRDA) regulated fund managers to help investors build a well-structured investment portfolio.

While NPS benefits are well-known, one should take an investment decision only after considering the benefits as well as the drawbacks. If you are planning to invest in NPS, here are some of the most important advantages and disadvantages of the scheme you should know about:

Advantages

1. Diversification

One of the biggest NPS scheme benefits is diversification. With a single investment, NPS allows you to invest in equity as well as debt market. Moreover, the investment is handled by professional fund managers to ensure that you optimise your return on investment. This also eliminates the need for you to manage your investment actively.

2. Different schemes to choose from

With NPS investment, you get Active and Auto Choice. The Active Choice allows you to select the asset allocation as per your age and risk profile. If you are new to investments and find asset allocation confusing, you can go with the Auto Choice. With this option, the asset allocation is automatically adjusted between government securities, corporate bonds, and equity as you age. You also get the option to switch between these options.

3. Convenience

Most authorised banks now allow people to apply for NPS account online. You'll be required to submit the filled up registration form, address proof, identity proof, and birth proof to apply for NPS. Once the account is opened, you can then access the same from anywhere in India. You also receive a 12-digit unique Permanent Retirement Account Number (PRAN) when you open the NPS account. This number remains the same throughout your life irrespective of how many times you switch your job.

Disadvantages

1. Partial tax exemption

On maturity, you can withdraw up to <Number>% of the corpus out of which <Number>% is tax-free, and the rest <Number>% is taxable at present. However, through an announcement made by the Government of India in <Month DD, YYYY>, the entire <Number>% withdrawal amount will be made tax free from Financial Year <YYYY>. This may soon make NPS one of the most competitive tax-saving investment options.

2. No withdrawals till maturity

While the maturity age of <X> for withdrawal is seen as a disadvantage, it is, in fact, one of the greatest benefits of NPS. It is a retirement scheme, and it is designed as such to make sure that investors remain invested until s/he reaches the retirement age. Schemes that allow you to withdraw funds as and when you like often make it difficult for investors to meet their financial objectives.

3. <Number>% limit on equity investments

With the Active option of NPS, you get to customise your asset allocation between government securities, corporate bonds and equity. However, the equity exposure can only be up to <number>%. Many investors aiming for higher returns see this as a significant drawback of NPS. However, there is a maximum limit on equity exposure to prevent losses. Equity markets are known for their high volatility and are mostly recommended to experienced investors. New investors with higher equity exposure can end up losing money.

To invest or not to invest in NPS?

Now that you know some of the most important advantages and drawbacks of NPS funds, you can decide whether or not it is the right option for you. Just like every other investment, NPS also has a few drawbacks. However, most of them have been intentionally put in place to meet the retirement objective of the scheme. If you are still finding it difficult to make a decision, get in touch with an investment advisor or PFRDA-authorised bank to know more.

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