The National Pension System (NPS) is a government-backed retirement savings scheme managed by the Pension Fund Regulatory and Development Authority (PFRDA). It offers market-linked returns through investments in equities, corporate bonds, government securities, and alternate investment funds.
Here are 5 proven strategies to maximise NPS returns:
1. Optimise Asset Allocation – Balance Equity & Debt Investments
a) Auto vs. Active Choice
Active Choice
- Investment Control: Subscribers decide the allocation percentage across four asset classes:
- Equity (E): Up to 75% until age 50, tapering down thereafter.
- Corporate Debt (C): Up to 100%.
- Government Securities (G): Up to 100%.
- Alternative Investment Funds (AIF): Maximum of 5%.
- Target Audience: Ideal for those who are knowledgeable about financial markets and prefer to manage their investments actively.
Auto Choice
- Lifecycle Approach: Funds are allocated automatically based on the subscriber’s age:
- Younger individuals have higher equity exposure.
- As the subscriber ages, the allocation shifts towards safer instruments.
- Available Funds: Subscribers can select from different lifecycle funds (e.g., LC25, LC50, LC75) that adjust automatically according to age.
- Target Audience: Suitable for those who prefer a passive investment strategy without the need for constant monitoring.
b) Balancing Risk & Returns
- Younger investors (20s–40s) should prioritise equities (up to 75%) for higher growth.
- Mid-career investors (40s–50s) should gradually reduce equity exposure by 2.5% annually to mitigate risk.
- Pre-retirees (50s–60s) should focus on government securities (G) and corporate bonds (C) to preserve capital.
2. Contribute More for Higher Growth & Tax Benefits
a) Boost Corpus Size
Increasing contributions by 5–10% annually can raise the final corpus by 15–20% due to compounding.
b) Tax Benefits
- Section 80C: Up to ₹1.5 lakh annually under the old regime.
- Section 80CCD(1B): Exclusive tax benefits upto to Rs. 50000 under section 80 CCD (1B) in addition to Rs. 1.5 lakhs under 80C.
- Section 80CCD (2): If your employer contributes to your NPS account, you can claim a deduction under Section 80CCD (2). It should not exceed 10% of your basic salary+ DA under the old regime and 14% of your basic salary under the new regime. It is subject to a ceiling of Rs. 7.50 lakhs. This exclusive benefit is specially designed for our valued corporate clients of the corporate NPS, offering you a unique advantage that sets you apart.
c) Power of Compounding
Starting early (e.g., at 25) with ₹5,000/month yields significantly higher returns than starting at 40 with ₹10,000/month.
3. Stay Invested Long-Term – Avoid Premature Withdrawals
a) Impact of Early Withdrawals
Withdrawing before 60 mandates using 80% of the corpus to buy annuities, reducing growth potential.
b) Benefits of Staying Till 60
- Full tax-free lump sum withdrawal (60% corpus).
- Higher annuity returns from accumulated growth.
c) UTI PFL’s Managed Funds
UTI Pension Fund Limited (UTI PFL) offers consistent returns through diversified portfolios, making it ideal for long-term investors.
4. Monitor & Adjust Investments Regularly
a) Review Portfolio Performance
Track Net Asset Value (NAV), fund returns vs. benchmarks, and risk-adjusted metrics quarterly.
b) Switch Fund Managers
The PFRDA allows all subscribers to change their Pension Fund Manager once a year.
c) Adjust Asset Allocation
Rebalance annually or during market shifts. For example, shift to debt during volatility or increase equity in downturns.
5. Choose the Right Pension Fund Manager – Opt for UTI PFL
a) Importance of PFM Selection
PFMs like UTI PFL influence returns through strategic asset allocation and risk management.
b) Why UTI PFL?
- Consistency: Top-tier historical performance in equity and debt segments.
- Risk-Adjusted Returns: Balances growth and stability across market cycles.
- Transparency: Regular NAV updates and detailed performance reports.
Conclusion
Maximising NPS returns requires a blend of strategic asset allocation, disciplined contributions, and long-term commitment. By leveraging tax benefits, staying invested, and choosing reliable PFMs like UTI PFL, investors can build a robust retirement corpus. Regular monitoring and adjustments ensure alignment with evolving financial goals and market dynamics, securing a financially stable retirement.
