7 reasons to prefer NPS over Index Funds

If you are someone who is totally frustrated with loss in equity investments, confused with your mutual fund performance and its ranking, bored tracking frequently changing TER expense ratio, stuck in calculating TER expense ratio compounding impact on mutual fund returns or still trying to figure out right asset allocation. You are a member of the 90% equity club. 

And after seeing Index Funds recent returns, you surely would have thought, it would have been much better if you had invested in Index Fund or Index ETF, then wasting time and money over different products. 

I have already covered Index funds in the below topics:

• How to become Rich through Index Investing?

• How to make Best use of Index Fund?

• Index Fund Investing way for Future?

But today we are going to discuss on NPS and its benefit over pure Index Investing. 

National Pension System (NPS)

National Pension System (NPS) is an amazing retirement planning product and government tax benefit is the icing on the top. It can provide a higher return over standard risk-free return products thanks to the element of market investment clubbed in it.  Every NPS Subscribers are provided unique Permanent Retirement Account Number (PRAN) somewhat like Folio Number in Mutual Funds.

NPS Investment Structure: 

NPS investment structure is divided into two accounts Tier-I and Tier-II:

• Tier I – Its a tax benefit account with a restriction on withdrawal till retirement. 

• Tier II – It an additional account provided to Tier-I account holders which can be used similar to any other mutual funds without restrictions on withdrawal. 

NPS Tax Saving and Benefit

Tier 1 Account holders are provided certain Tax Deductions for Investment in NPS. 

1. Investors can avail a tax benefit upto Rs. 2 lakhs

• Section 80CCD(1): Tax deduction upto Rs. 150,000 (Under Section 80C)
• Section 80CCD(1b) additional NPS employee contribution: Rs.50,000. Most investors use this to avail additional tax benefits over 1.5 lacs usually claimed under Section 80C.

2. 10% of basic salary + dearness allowance as per section 80CCD(2)

This is an additional tax benefit over and above Rs. 2 lakhs (discussed in point 1 above) provide to Corporate NPS subscribers.

NPS is a long duration product and the government keeps on adding various initiatives in it. So keep a tab on NPS Website for the latest update before investing. 

NPS Return Vs Index Funds Return

With the introduction of NPS online contribution, it has become very convenient to invest in NPS similar to any other Mutual Funds. Also, Fund Management Charges (FMC) of NPS are very low (0.01% p.a. of the total accumulated amount).


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7 reasons to prefer NPS over Index Funds:

1. Tax Benefit on Investment. 
2. Low cost compared to Index funds.
3. Asset allocation in Equity and Debt in Single Product. 
4. NPS Auto Choice option: This is an amazing option. It does asset allocation for you, free of charge based on your age. Personal favorite: NPS auto-aggressive choice.
5. No tax impact or exit load for reshuffling between Fund House (I personally don't recommend doing it, unless you have a lagged performer). 
6. Due to strong lock-in, it restricts your temptation of market timing and helps you experience the so-called Power of Compounding in equity.
7. Tax-free withdrawal on maturity after purchase of an annuity with a minimum 40% of the maturity corpus.

NPS recent performance has proven by it is better than Index funds. 

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NPS Yearly Returns 

Conclusion

Every investment has its own pros and cons. So understand both products before investing based on your retirement plan, return expectations, risk appetite and investment philosophy. Let your money grow and not your stress. Enjoy the life of Stressfree Investor 😃


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