Why NPS is a Bad investment Product ?

Is NPS really good for investment!!!!

What is NPS? It is National Pension Saving scheme introduced by govt …. The rules are so complex beyond the understanding of common man. After communicating many people I got to know they only invest in this because Govt is sponsoring this …. If at all NPS invests in Stocks since Govt sponsoring this , so it might be safe and guaranteed to invest  in this J --- Many people thinks, who stay away from mutual funds because it is stock market dependent :D

Let me tell you NPS will not provide annuity .The aim of NPS is to provide you corpus.you need to buy one from the insurer’s . The lists are as here

NPS is not giving you any guaranteed returns like EPF or PPF.

NPS is like a mutual fund and carries all the risk like a mutual fund carries.

80% will be annuitized if you retire before 60 (after Budget 2016, 40% is tax free withdrawal, 80% of remaining corpus has to be annuitized official confirmation awaited). This is terribly bad. Do you have any guaranty to work till 60 in today’s corporate world?

Poor exit option and liquidity: If you exit before 60 , you need to annuitized 80% . Rest 20% withdraw is also taxable . OMG! a heavy punishment !!

Other headaches are as below:

• I cannot exit the scheme without practically losing my corpus to an annuity
• I will need to switch only among the fund mangers authorised to manage NPS. As of now, there is no easy way to gauge who is better.
• Although switching is permitted, I will be extremely surprised if this is hassle-free!
• To sum it up, NPS is a prison cell for the serious investor who would like to actively manage ones retirement corpus.

Some people argued like after 80c , 1.5 lakh it gives addiditional 50,000 tax benefit . . What about utilizing the "extra" 50,000 limit to invest in NPS. Again, that is not advisable.  The amount at the time of withdrawal is taxable, which makes it not worth considering.  Also, NPS has some detailed provisions on what can be done to the corpus after you turn 60; how much can be withdrawn as lump-sum and in what manner, and how much is to be converted to an annuity, etc.

Until NPS gets into the EEE category, it is better to avoid it entirely.

If someone at the age of 30 years, invests Rs50,000 for the next 30 years, her NPS corpus at retirement (age 60), compounded at 10%, would work out to Rs90.47 lakh. Here we have assumed the equity portfolio returns 12% annually and the fixed income portfolio will return 8% annually. Hence the weighted return of the portfolio works out to 10%, as only a maximum of 50% can be invested in equity.(This is at higher end calculation)

 She withdraws 60% of the corpus and invests the remaining 40% in an annuity. The 60% corpus withdrawn, i.e. Rs54.28 lakh, will be treated as her income and taxed. Assuming the current highest tax rate, of 30.9%, she will be left with Rs37.51 lakh. The total value of her corpus at retirement, including the annuity investment, would be Rs73.70 lakh.

 What if she invested Rs50,000 every year in a top-performing tax-saving equity mutual fund scheme? The corpus would be worth Rs2.03 crore (assuming a compounded annual return of 14%) and this entire amount would be tax-free. Even if the scheme returned a moderate rate of 12%, her corpus would be worth Rs1.35 crore, almost double the corpus created in NPS.

 If she invested Rs50, 000 in PPF, the corpus would grow to Rs70.06 lakh with an annual interest of 8.70%. This too would be tax-free. In fact, NPS will turn out to be only marginally better than PPF, despite the higher risk from the equity portfolio.

Unless withdrawals are made tax-free on exit and a higher allocation to equity is permitted, NPS would fail to attract investors. Till then, those looking for higher post-tax returns will flock to equity-linked savings schemes or mutual fund retirement plans.

Disclaimer:

I am not a NPS investor because of its Taxation and withdrawal rules. I may again revisit this blog if Govt change its pattern from EET to EEE if any case of which probability is NIL :).This writing has been inspired by Pattu's freefincal and Subramoney'blogs. Also i did not discuss about the NPS which Govt employees are getting as a salary deduction instead of EPF.For them 50% contribution is from Govt. This blog is about personal NPS.