Sometime back, I had written about the NPS – giving reasons why I was totally against it and instead suggested that one should consider starting a SIP in a Mutual Fund for the long term as a retirement plan. I have reproduced the article below for those who have recently subscribed.
I got a few responses to that article. Two of them are as follows:
Niranjan has often advised in favor of starting a SIP, which I disagree. You have no control on the buying price. You give standing instructions to buy on a particular date or price, irrespective of the market. Quite a foolhardy thing to do, even if you are remotely following the market. Other than those who are sailing out on a sea voyage. I do not advise anyone to opt for SIP. It makes common sense that you retain the buy / sell decision with yourself. At best, SIP enforces you to invest regularly in a disciplined manner, but that is small comfort for the intelligent and diligent.
My response: The gentleman is absolutely right in that it is not the best strategy to invest in the market (through MFs or direct investment) based on a date, but it ideally should be based on the study of the level that the stock market is at and also a study of a particular Fund or share. However, almost none of us have the time and the knowledge to do so, hence a SIP in a MF is the next best alternative.
The second response was from a lady, she says
My father is very happy getting a cheque every month from his Insurance company over and above his Pension. He had also invested in Mutual Funds, but withdrew his money as he had lost a lot.
My response: Yes, he will get a cheque from the Insurance company, but had he invested in Mutual Funds, the cheque would have been at least 3 times more. It would have made him happier.
We tell our clients that the investments in Mutual Funds should be only through a SIP – not a lumpsum and it should have a minimum investment horizon of 8 – 10 years. The time is needed to protect against the volatility of the market. Historically, it is proved that an investment in the stock market almost never will lose money if kept for that time frame.
The original Post:
National Pension Scheme
In the recent budget, the Finance Minister gave a boost to the National Pension Scheme by giving an additional tax exemption of Rs.50,000 for investing in it.
Some of my friends called me up to ask if I had changed my views on this scheme, now that it had got a fillip in the budget – I have disliked the scheme from the start and was very vocal about it. How do I feel about the scheme now? I feel those who compulsorily contribute to the EPF should change to NPS if they have the option. Others should not even consider the NPS.
I feel that the scheme is just too complex. Whenever there are many choices and options, most people do not understand the long term implications of choosing one or the other and leave it to the one person who doesn’t really give a damn – the agent. He gets his brokerage wherever you invest anyway.
Choosing the ‘default’ option created by the government babus is equally bad.
Some of reasons why I don’t like the scheme:
. Too complex
. There are two accounts – Tier 1, which is compulsory and Tier 2 which is voluntary
. Tier 1 compulsorily gives and exposure of a max of 15% to the stock markets and Tier2 gives an exposure of 50% to the stock market. Both grossly inadequate.
. At the age of 60, a minimum of 40% of the amount accumulated should compulsorily be ‘annuitised’. It took me a long time to understand the word ‘annuity’. I feel it is a synonym for ‘screwed’. If say, one saves 50 lacs in the NPS till the age of 60 and at that point of time, buys an annuity of the 40% of the amount, ie.Rs.20 lacs. Then he will get a pension ‘for life’ of Rs.745 x 20 = 14,900! One could really live it up with this amount. (This figure is from the Pension Authority Website).
o The story does not end there – this amount is taxable! Even assuming a 20% tax bracket, the net amount in hand would be Rs.11,920.
o Wait, there’s more – what happens if I’m the Pensioner and I die? Provided I opted for the relevant scheme, my wife gets the pension. What happens when she dies? The ‘annuity’ amount just disappears!
o Of course, one can take a scheme where there is a ‘return of purchase price’ of the annuity, but that will reduce the pension to an even more ridiculous level.
o One thing I forgot – 40% of the amount should be compulsorily ‘annuitised’, what about the remaining 60%? That is withdrawn at the age of 60 (can be held upto the age of 70), but this withdrawal is also taxable.
. There is another point relevant not only in this case, but in other cases of planning for retirement – most retirement plans say that once one comes close to the retirement age, one should move funds from the Stock Market to Fixed Income instruments – FDs, etc. I sharply disagree with this. When one retires, the income stops, not the expenses. So, it is more important to make the money you have saved work harder to beat inflation. The stock market via mutual funds is probably the only avenue that has a chance of beating inflation.
Would strongly recommend not to invest in this scheme inspite of the tax break at investment. You really require the tax break when you are old and not earning. I feel a Mutual Fund SIP started early enough is probably the best tax free pension plan.
Disclaimer: We are Mutual Fund brokers also. So, may be biased towards Mutual funds. Would like to hear any contrary views on the above subject.