Retirement Mutual Fund Vs NPS: Which one is better for you?

Retirement Mutual Fund Vs NPS: Which one is better for you?

 

After retirement, life offers fresh experiences. It is time you start enjoying your life stress-free. But it can only happen if you have sufficient funds, as working in old age seems a little overwhelming. If you plan your retirement well during your working years, you will worry less and enjoy more.

 

Currently, different investment options can help you to plan for your retirement. But in this article, we will look at the two investment options: Retirement Fund and National Pension System.

 

What is a retirement mutual fund?

A retirement mutual fund is a solution-oriented mutual fund that aims to help people plan for their retirement. Typically, these funds invest in a mix of assets such as equities and debt. These funds come with three plans with different asset allocations. The aggressive plan has a higher equity exposure and is more suited for young investors. On the other hand, the conservative plan has the lowest equity exposure for investors close to their retirement.

 

Advantages of retirement funds:
The lock-in period of five years or until retirement age (whichever comes first) can assist you in staying focused on your retirement plan.

       You can take advantage of automatic rebalancing of your portfolio by switching between different plans.

       It takes into account the changing risk tolerance levels and fluctuating levels of comfort that investors have with risk

 

What is NPS?

The National Pension System(NPS) is a scheme launched by the government of India to benefit employees in the public/private sector, including the ones in the unorganized sector. Individuals can contribute a minimum of Rs.6000 per annum in one go or Rs.500 every month.

 

The scheme matures at 60 years of the subscribers and may be extended to no more than 70 years. In specific situations, subscribers can withdraw up to 25% of the money invested after three years of opening an NPS account.

 

Benefits of NPS:
Comes with tax-deduction benefits

       Government-backed scheme

       Ease of access

 

Retirement fund Vs NPS

Though the objectives of both schemes may be similar, they have basic differences. Let’s discuss them.

 

Equity Exposure

In the case of retirement funds, the equity exposure of the aggressive plan of the fund is the highest. The maximum equity allocation of these plans depends on the respective fund house. So, there is no mandated maximum equity exposure.

 

However, in the case of NPS, the maximum equity exposure permitted is 75% up to 50 years under the active choice.

 

Investment plans:

Retirement funds come with three plans. Investors can choose the plan that best suits them, and the fund manager takes the investment decisions.

 

While in NPS, you have two choices: auto choice and active choice. In auto choice, a manager is appointed to take care of your investments, while in active choice, you’re free to choose different types of investments as per your requirements.

 

Taxation

Currently, there are no tax benefits for investing in a retirement mutual fund.

 

However, in the case of NPS, investments up to Rs.1.5 lakhs come under section 80C. In addition, an additional amount of Rs 50,000 is exempted. This means that a total of Rs 2,00,000 per year is exempted from tax under NPS. The NPS falls under two sections: 80CCD (1) and 80CCD (1B).

 

However, after retirement, the income from annuities is applicable to tax.

 

Withdrawals

Investors can redeem their investments after five years or when they turn 60. However, withdrawal from NPS is only allowed under special circumstances. Under regular circumstances, when a subscriber becomes 60 or reaches the age of superannuation, they must spend at least 40% of the total pension fund to buy an annuity that would pay a regular monthly income. The remaining money is available for lump sum withdrawal.

 

Which is a better option: retirement funds or NPS?

When it comes to investments, you must remember that no investment is right or wrong. Any investment that aligns with your financial goals is perfect for you. If you have pre-set retirement goals like traveling the world, retirement funds may be an ideal option for you. For example, you can invest in equity instruments that would generate relatively higher returns but do not forget they come with a little high risk too. NPS may be ideal for individuals who want a fixed monthly income after retirement.

 

However, it is best to consult a financial expert while making long-term financial decisions. 

Raja Bhattacharjee

 Email:  investment.junctions@gmail.com

 Phone: 09830146206

 Office : 09681518774   /  7449858289

This blog is purely for educational purposes and not to be treated as personal advice.

 Mutual funds are subject to market risks, read all scheme-related documents carefully.

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Whether to go for mutual funds or PMS?

Portfolio Management Services (PMS) may sound like mutual funds. Are you confused between PMS and Mutual Funds? While there are similarities, they are not the same.

Before understanding the differences between the two, we need to understand mutual and PMS.  

Mutual Funds

When an entity invests money in stocks, bonds, money market instruments, or other securities after collecting funds from several investors with similar investment goals, such a financial instrument is known as a Mutual Fund. And by determining a scheme's "Net Asset Value," or NAV, the returns earned from this collective investment are distributed proportionately among the investors after considering any applicable expenses and levies.

Portfolio Management Services

PMS is a financial service provided by the portfolio manager to achieve the required rate of return while maintaining the desired level of risk. A portfolio manager is a qualified investment professional with extensive knowledge of the market's various instruments who focuses on analyzing the investor's investment goals. Stocks, fixed income, commodities, real estate, other structured products, and cash can all be included in an investment portfolio.

PMS is a customized service offered as per the investor's return requirements and the ability and willingness to assume the risk. A PMS drafts an Investment Policy Statement (IPS) to understand the financial position and needs of the client. The portfolio manager ensures that the return requirements coincide with the risk profile.

Now that we know all about mutual funds and portfolio management services, there are a few ways in which you can decide on what type of investment avenue suits you the best.

1. Mutual Funds work in a rigid framework by their mandate and invest in instruments as per the scheme’s investment objective. However, PMS offers a customizable regime to their investors, where the portfolio is constructed at a macro level.
2. The cost of a PMS is higher than that of mutual funds. Mutual funds are more cost-effective and more suitable for retail investors.
3. As mutual funds are pooled investments, other investors' actions can impact the mutual fund's performance. For example, suppose an investor withdraws a considerable sum of their invested amount from the fund. In that case, the fund manager might have to sell good papers to cover the liquidity requirements. In such a case, the NAV of the scheme might fall due to redemption pressures. But in PMS, the actions of individuals do not affect the returns and investments of other investors.
4. Investors may choose funds as per their financial goals and risk appetite. In mutual funds, you can start investing at as low as Rs 500 monthly. In PMS, a minimum investment of Rs 50 lakh is required.
5. You pay short-term or long-term capital gains on every transaction. Long-term capital gains in equity mutual funds are taxable at 10% per annum, including cess and surcharge without indexation on gains above Rs 1,00,000 in a financial year. Short-term capital gains are taxable at 15%, including cess and surcharge. Moreover, mutual fund scheme owners have to pay tax only on redemption. The tax on Portfolio Management Services is not as efficient.
6. The investing process in mutual funds is easy. The investment process for Portfolio Management Service is more tiresome considering the higher value of transactions.
7. PMS must make timely disclosures to the client for transparency, as these are not freely available to the public. Moreover, it is not easy to assess and compare the performance of different PMS products. But in the case of Mutual Funds, they are strictly regulated, and all the information is public. You can easily compare performances.
8. A PMS can focus on performance and can make investment decisions such that the absolute returns are maximized. They can focus more on returns as compared to MFs that have to take care of diversification rules, valuation guidelines, and redemption-related regulations.

By comparing mutual funds and PMS, you can make investment decisions according to your financial objectives and ability to take risks, for further queries please call us.

Raja Bhattacharjee

 

email:  investment.junctions@gmail.com

 Phone: 09830146206

 Office : 09681518774   /  7449858289

 

website: https://www.investmentjunctions.com

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.