Long term Returns comparison should be made before investing National Pension Scheme (NPS)

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THE national pension scheme (NPS) has been showing good results vis à-vis funds managed by the various portfolio managers. In fact, the return in some options has crossed the 10 per cent mark in the past one year.

An investor should ask himself if this should make him sit up, and check how it compares with other options available in the market. His decision should depend on how he looks at these questions.

Overall nature:

 

The NPS is an investment where the investor will put his money in a specific fund and select a fund manager who will manage it. For options, he has various types of funds. This means he has choices in terms of the type of exposure he wants and may select the one that best matches his risk profile.

The returns earned on this investment will therefore not be known beforehand and could vary depending on market conditions and the way the fund manager handles the varying situations.

This gives a twist to the entire way the investment ought to be considered and that is why this should form the basis for all future steps in the whole chain of activity.

Steady returns:

 

Often, investors compare the performance of the NPS against that of instruments like the employees' provident fund (EPF) or the public provident fund (PPF). But such comparisons in the short-term are flawed because of the difference in the basic nature of the instruments and the way they actually earn returns.

The EPF and the PPF are instruments that provide returns in the form of interest and there is no capital gain or loss in the investment. The returns over a period of time will show how the investor has been able to earn returns, as this will vary with changes in the interest rates.

Right comparison:

When it comes to the NPS, there would be a higher degree of volatility in the returns due to the very nature of the scheme. The change in interest rates would impact the capital gains or losses on the bonds held by the debt funds and even equity markets would impact the equity part of the portfolio for investors who have opted for an exposure to this area.

For those who have chosen this option, the right thing would be adopting a balanced approach regarding the part where there is equity in the portfolio. At the same time, the debt options have to be looked at vis-à vis other choices like income and gilt funds present in the market.

Time period:

One should also know that short-term comparisons might not always give a correct picture of the situation. This is because the NPS is a long term instrument and the individual has to see it as one. Trend and longer term performance would be the right base on which the decision would be made about investments and the amount of money parked.

The investor must therefore understand that his money will be locked in for a longer time; so he should try to foresee how the situation would pan out over the next many years.

This is what should form the basis for his investment decision in terms of his choice of the NPS and the amount concerned.

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