Choose your own investment options, pension fund managers

Looking to build your retirement corpus, you could look at the New Pension System(NPS). Launched by the Indian government, the tier I scheme offered by NPS, is a pension scheme allows investors to choose their own investment options and pension fund managers.

Open to anyone between 18 and 55 years, a minimum of Rs 6,000 has to be invested each year, until age 60. At maturity, that is, age 60, investors would be required to invest a minimum of 40 per cent of the accumulated amount to purchase a life annuity. The rest of the money can be withdrawn in a lump sum or in a phased manner.

Investing Rs 6,000 per annum at a 12 per cent rate of interest,  for the maximum term of 37 years,  one would have collected a corpus of over Rs 3.65 crore at an in12 per cent . However, these returns are not guaranteed and the returns would depend on how the pension fund you choose (out of the designated seven), actaully performs. 

Like any other pension scheme, NPS invests’ in government and other debt products. Its equity investments will be capped at 50 per cent.

Currently, there aren’t many pension products options to choose from. Besides  public provident fund (PPF), there are just a couple of plans in the mutual fund and in the unit linked insurance pension products segment. Most insurance companies have pulled out their unit linked products after regulator, Insurance Regulatory Development Authority (IRDA) came up with a 4.5 per cent guaranteed returns mandatory. However, the traditional retirement plans offered by insurance companies, remain a good option with their built-in guarantees and option for loans against the cash value of the policy.  

While PPF remains a popular investment avenue, the restriction of investing Rs 70,000 only per annum works against it. There is no upper limit for investment in NPS and the others.  

However, it is with regards to fund management charges (FMC), that NPS really scores. While FMC for NPS is a mere 0.0009 per cent or 90 paise per lakh, it is 1 per cent or Rs. 1000 per lakh in case of mutual funds. Insurance companies charge up to 1.35 per cent or Rs. 1350 per lakh.

Many believe, the long lock-in period for the pension scheme works against the NPS.  PPFs and other exiting pension that plans allow partial withdrawals are far more liquid.