Retirement Planning: NPS vs Equity Savings Funds: Every investor wants to have regular income after retirement. National Pension System and equity savings funds are two investment options that can provide regular income after retirement. Both the schemes have their own features and benefits. NPS is a government-backed scheme, through which investments are made in equity and debt instruments. In this, up to 60 percent tax-free withdrawal facility is available on maturity and the remaining 40 percent amount has to be invested to buy annuity. On the other hand, equity savings funds are more flexible, allowing investors to withdraw money as per their need. However, the tax burden and management fees may be higher. Which of these options will be better for you depends on your financial preferences and needs. Before taking any decision in this regard, it is important to consider things like performance, cost, risk and taxation of both the options.
NPS: Low cost and tax-free benefits
Tier 1 account of the National Pension System (NPS) is considered a good option for regular income after retirement. The scheme mainly invests in both equity and debt instruments. The portion of equity investment in NPS depends on the age of the investor, which can be up to a maximum of 75%. Large-cap shares constitute the majority of this equity holding. The remaining amount is invested in AAA rated corporate bonds and Government Securities (GSec). A major advantage of NPS is that you can withdraw up to 60% of your corpus tax-free. It is important to invest the remaining amount in annuity, so that you continue to get regular pension. Apart from this, the management fee of NPS also does not exceed 0.09%, which is very low.
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Equity Savings Funds: Balanced returns with flexibility
Equity Savings Funds are a better option for those who want more control over their investments. This fund invests in equity, debt and arbitrage instruments, thereby maintaining a balanced investment. In these funds, the share of equity can be 15-40% and the share of arbitrage can be 25-50%. The remaining investment is made in debt. The special thing about these funds is that you can withdraw money as per your need through Systematic Withdrawal Plan (SWP). However, their management fees are higher than NPS. The average expense ratio of equity savings funds is 0.64%. Even in terms of taxation, these funds are less beneficial than NPS. On withdrawal of money after one year, there is no tax on profits up to Rs 1.25 lakh, while 12.5% tax has to be paid on profits above this. Withdrawal of money before one year attracts 20% short-term capital gains tax.
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Who is better in the last 10 years’ performance?
Data over the last 10 years shows that NPS has generally performed better than equity savings funds in terms of returns. If we calculate on the basis of average returns of both types of schemes, then it is found that if you had invested Rs 1 crore in NPS and withdrew Rs 50,000 every month, then after 10 years you would have been left with Rs 1.94 crore. On the contrary, if the same amount was invested in equity savings funds and you withdrew Rs 50,000 every month through a systematic withdrawal plan, you would have been left with Rs 1.50 crore after 10 years. Apart from this, this scheme becomes even more beneficial because the money withdrawn from NPS is tax-free.
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Where is less risk and more stability?
Both NPS and Equity Savings Funds are such investment options in which the risk is considered less as compared to investing money directly in the market. But the structure of the portfolio of both is such that NPS can be called less risky than equity savings funds. The average standard deviation of NPS is also 5.35%, which is slightly lower than that of equity savings funds at 5.4%. This shows that there is a possibility of getting more stable returns in NPS.
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Which option to choose?
If you want to achieve low costs, tax-free benefits and high returns, then NPS is better for you. This scheme is especially suitable for those investors who want to keep their retirement funds safe for the long term. On the other hand, if you want more control over your retirement fund and the convenience of withdrawing money as per your need is important to you, then you can consider investing in equity savings funds. That is, in terms of tax-free withdrawal and low cost, NPS can be said to be better for long term investors. Whereas equity savings funds can meet the needs of those investors who want more flexibility. Overall, both NPS and equity savings funds are good options for regular income after retirement. Your investment decision depends on your preferences, risk appetite and investment objective.
