The performance of individual schemes is not very helpful because NPS investors put money in a combination of funds. Therefore, Economic Times studied the blended returns of four different combinations of the equity , corporate debt and gilt funds. Ultra-safe investors are assumed to have put 60% in gilt funds, 40% in corporate bond funds and nothing in equity funds. A conservative investor would put 20% in stocks, 30% in corporate bonds and 50% in gilts. A balanced allocation would put 33.3% in each of the three classes of funds while an aggressive investor would invest the maximum 50% in the equity fund, 30% in corporate bonds and 20% in gilts. The table shows the average blended returns of the seven pension funds.
Admittedly , the short-term picture of the NPS is not very encouraging because of the negative returns from stocks in the past one year. Aggressive investors have earned less than 3% and balanced investors made only 4.93%, though ultra-safe investors who stayed away from stocks got 8.89%.
But the long-term picture is different. On average, gilt funds have given 9.75% annualised returns while corporate debt funds have churned out more than 11% in the past five years. As a result, the average return for ultra-safe investors in the past five years is in double digits. The average NPS fund has given 100-125 basis points more than what the retirement savings of the estimated 3.7 crore EPF subscribers have earned during this period. Even a 100 basis point higher return can make large impact on the corpus in the long term.
Will the good times continue for gilt funds and corporate bond funds?
Experts say this trend will not stay forever. NPS is a long-term investment and the bonds are predominantly held to maturity . Over a longer period, the portfolios will deliver returns similar to the yield-to-maturity of the bonds in the portfolios. The average yield-to-maturity of the bonds is roughly 8.4%, which is higher than the PPF rate but lower than what the EPF offers.
Should you switch from EPF to NPS?
This raises the critical question: should you switch from EPF to the pension scheme? The proposal to switch from EPF to NPS was announced in last year's budget and this year's budget extended a onetime tax exemption to such a shift.A le gislation to amend the Employees' Provident Fund & Miscellaneous Provisions Act has already been framed and is lying with the Law Ministry . The amendment allows EPF subscribers to make a one-time switch to the NPS. Once he shifts to NPS, the employee will have a one-time chance to return to the EPF fold.
But experts believe it may not be a wise move to shift your retirement savings to the NPS because of the difference in tax treatment. While the EPF corpus is completely tax free, this year's budget has proposed to make 40% of the NPS tax free. Pension Fund Regulatory and Development Authority (PFRDA) chairman Hemant Contractor says there should be tax parity in all retirement products. Why would anybody want to shift his money from the fully tax-free EPF to the NPS where only 40% of the corpus will escape tax? If there is parity in the tax treatment, a lot of subscribers would shift from EPF to NPS," .
For investors, the tax benefits are an important consideration. The new tax deduction offered on the NPS attracted investors in a big way in 2014-15, with almost 1.2 lakh new voluntary accounts opened during the year. Within nine months, the assets under management of funds for the private sector shot up more than three-fold from Rs 6,361 crore in April 2015 to touch Rs 20,261 crore by December 31, 2015.
Financial advisors see another problem in the NPS. At least 40% of the maturity corpus has to be put in an annuity to earn a monthly pension. Annuity rates in India are very low compared to what other options can offer. The Senior Citizens' Saving Scheme, for instance, gives 8.6% returns compared to 6.75% offered by annuities that return the principal after death. The PFRDA wants that the investor should be allowed to look beyond annuities.
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