Why should an investor even consider the NPS when there are mutual funds to invest in the same market-linked instruments? Rahul cites four advantages.

The first is the very low cost/management fee in NPS, which ranges from 0.03-0.09 per cent a year for different pension managers. Mutual funds charge upto 2 per cent a year. Two, the many risk controls in the NPS, which require fund managers to invest only in the BSE 200 stocks and bonds with ratings of AA and above. Three, the tax breaks under NPS which are not available with mutual funds. Finally, switches between asset classes in the NPS attract no tax and that’s a big plus for periodic rebalancing.

Elaborating on NPS tax breaks, Rahul explains that investments in NPS by private individuals upto Rs 1.5 lakh a year are exempt under section 80C. Besides, under section 8OCCD, an additional Rs 50,000 can be invested or tax breaks. Not many people are aware that NPS offers other tax benefits too.

If you enrol for a corporate NPS with your employer, the employer can contribute upto 10 per cent of your basic pay into your NPS account, fetching you a tax exemption. This is subject to the cap of Rs 7.5 lakh a year.

On the investment strategy of NPS managers, Rahul explains that DSP Pension Fund Managers is very focused on alpha generation. Though NPS managers are only allowed to invest in BSE200 stocks and some of them take a fairly passive approach to their NPS portfolios, DSP Pension Fund adopts a concentrated and risk-controlled strategy to aim at alpha for investors. It filters companies for zero debt, good capital return ratios and other parameters and holds a 30-40 stock portfolio, to deliver better performance. He states that the predictability of inflows and outflows in the case of NPS gives its fund managers greater leeway not to manage for short-term returns.

Talking of NPS features, he explains how the scheme has gotten more attractive over years. He specifically discusses the rules for early withdrawal. Recent changes in NPS rules have allowed investors to withdraw from the scheme after a 5-year lock in period, provided 80 per cent of the proceeds can be used to buy an annuity. He also explains why buying an annuity out of the retirement proceeds is not such a bad deal for investors.

Tune in to the State of the Economy podcast to know more about the NPS.

Host: Aarati Krishnan, Producer: Renil S Varghese

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