RETIREMENT IS LIFE'S longest goal. One should start saving for post-retirement life as soon as one starts earning. The idea is to build a well-diversified portfolio across equities and fixed income as early as possible and then let it compound over the long term. The National Pension Scheme (NPS) gives you the option of choosing asset allocation as per your risk appetite and time left to retire. Low cost is an added benefit. In NPS, HDFC Pension, LIC Pension, and ICICI Prudential Pension are top performers in equity, corporate bond and government securities categories, respectively.
The largest pension fund, HDFC Pension Management, with asset under management (AUM) of ₹33,657 crore in Tier-1 schemes, has outshone its peers. Sriram Iyer, CEO of HDFC Pension, says the fund built a portfolio diversified across sectors and took active calls to generate superior returns. In corporate bonds, the fund takes exposure to high quality debt from a defined universe of companies that meet its credit exposure norms. In government bonds, HDFC Pension actively manages duration while trying to find the best value on the yield curve. HDFC Pension fund AUM has grown 47% over last year.
NPS provides subscribers flexibility to invest in a mix of asset classes, including equities (up to 75%), government securities, corporate bonds (up to 100%) and alternative assets (up to 5%). It allows subscribers to choose the fund manager and provides a host of tax benefits. For instance, NPS subscribers can claim tax benefit under Section 80 CCD (1) within the overall cap of ₹1.5 lakh under Section 80 CCE. Over and above this, under Section 80CCD (1B), subscribers get additional deduction for up to ₹50,000. Subscribers working in the corporate sector can additionally claim up to 10% of basic salary if their employer has opted for NPS instead of EPF. On retirement, subscribers can withdraw 60% of the accumulated corpus tax-free.
A look at the equity portfolio of NPS plans reveals similarity in their biggest holdings. HDFC Pension Fund's top holdings are RIL (8.12%), ICICI Bank (8.02%), HDFC Bank (6.44%), Infosys (6.36%) and Axis Bank (3.70%). LIC Pension Fund's top stocks are RIL (7.83%), ICICI Bank (7.46%), HDFC Bank (6.70%), Infosys (5.88%) and L&T (3.79%). ICICI Pension Fund's top holdings include ICICI Bank (8.64%), RIL (7.40%), Infosys (6.84%), HDFC Bank (6.22%) and SBI (4.33%).
With lowest cost of 0.09%, NPS is the most cost-effective way of generating inflation-beating returns over the long run, says Sumit Mohindra, CEO, ICICI Prudential Pension Funds Management. "Equity as an asset class has the propensity to deliver inflation-beating returns in the long run. Thus, over the long horizon, the high returns generated by equity funds of NPS offset the volatility risk associated with the investment," says Mohindra.
To earn superior risk-adjusted inflation-beating returns, investors must make the right asset allocation, says Sriram Iyer of HDFC Pension. NPS offers three risk appetite-based options — conservative, moderate and aggressive — wherein allocation to equity is brought down with every passing year. This is an excellent feature given that most investors are unable to adopt such a calibrated approach on account of behavioural biases that all of us suffer from, says Iyer. In effect, NPS is not just a great inflation-beating product, it also offers fantastic risk management to reduce portfolio volatility as one approaches superannuation, he says.
Early Bird Advantage
It’s best to start early to save for retirement goals. Starting early helps a person accumulate a bigger corpus due to compounding. Sumit Mohindra of ICICI Prudential Pension Funds says assuming a CAGR of 10%, a subscriber aged 25 years, investing ₹10,000 per month, will accumulate ₹3.79 crore, while a subscriber starting at 41 will be able to accumulate only ₹41 lakh till retirement. Tax exemptions, lower charges and inter-scheme mobility are added incentives.