How safe is an investment in NPS? Read on to understand

When investing in a retirement corpus, safety is a primary concern for most individuals. The retirement corpus is often the biggest and most important corpus that an individual creates during their lifetime. Therefore, it is crucial to ensure that the investment options chosen are safe and reliable. One such option is the National Pension System (NPS), which is a government-backed pension scheme in India.

The NPS is designed to help individuals build a retirement corpus and provide a regular pension after retirement. But how safe is it given the fact that they invest in equities? Read on to find out.

What is an NPS scheme?

The National Pension System (NPS) is a government-sponsored retirement savings plan that enables individuals to save money over the course of their lives and receive regular payments during their retirement years. It is a voluntary, long-term pension plan that requires regular contributions from the participant and offers tax advantages.

The Pension Fund Regulatory and Development Authority (PFRDA) manages the NPS, which has two accounts, Tier I and Tier II. The Tier I account is a mandatory NPS account that enables individual to save for retirement. The Tier II account, which is known as investment account, provides the option to withdraw funds as needed.

Individuals can also customize their pension portfolio through the NPS’s investment options. It offers the choice between equity, debt, and government securities as asset classes. The portfolio is then diversified by the fund manager based on these decisions, which can be changed as in when required – the option is with the subscriber and exercised seamlessly online without any tax incidence.

Does NPS invest in equities?

Yes, NPS does invest in equities. It invests in stocks, corporate bonds, and other equity-related investments, as mandated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS subscribers are allocated an equity portion of their portfolio, depending on their risk profile. This portion is invested in stocks of the Nifty 200 companies, and maximum under the large-cap stocks. The equity portion of NPS investments is actively managed and its performance is monitored regularly with strict adherence of the investment guidelines issued by regulator PFRDA.

Is NPS risky?

Due to its long-term nature, investing in NPS is generally regarded as less risky than investing in other market-linked investments. It is intended to assist individuals in accumulating a retirement corpus over a period of 20 to 30 years; therefore, it is less susceptible to short-term market fluctuations.

It is important to note, however, that investing in NPS does involve some risk, particularly if the portfolio is heavily invested in equities. Short-term fluctuations in the value of equity investments exist, as does the risk of capital loss. In order to mitigate this risk, NPS allows investors to allocate their funds across a variety of asset classes, including equities, corporate bonds, government securities, and alternative investment funds.

Using an NPS scheme calculator, investors can evaluate their risk profile and investment objectives, and make informed decisions about their portfolio allocation.

Conclusion

Before investing in NPS, investors must evaluate their risk profile and investment objectives. Those with higher risk tolerance and a longer investment horizon may opt for a higher equity allocation in their NPS portfolio. Alternatively, investors with a lower risk tolerance may opt for a greater allocation to debt or fixed-income instruments.