How often do you think about the future? Do you dream about a time when a 9-to-5 doesn’t hold you back from travelling the world or spending time with your loved ones? Dreaming about the future is one thing, but planning for it requires time and effort. Most people rely on the National Pension System to help them secure their retirement. If you’re considering your pension options, let’s evaluate the returns from NPS.
Understanding NPS Investments
Before considering the returns from NPS, we must understand how the investment works. When you register for the NPS, you open a Tier I account. Every year, you must contribute at least Rs.1,000 to this account. Depending on your future goals, you can choose an investment strategy.
- Active Choice
Active choice investors can select how their money gets invested across the available asset classes. You decide the allocation of funds for equities, corporate bonds, government securities, and alternate investment funds. The NPS prioritizes safety and stability, so they cap your investment in equities and alternate investment funds. Individuals with a moderate risk appetite can invest the entire amount in corporate bonds. Those with the lowest risk appetite can invest solely in government securities. Investing in equities could give you a high chance to increase your returns. You can invest up to 75% of your funds in equities. As you near retirement, you can limit your exposure to ensure you enjoy safer returns from NPS.
- Auto Choice
The NPS offers an automated investment route known as the lifecycle fund option. Depending on your age, the NPS will automatically invest in the various asset classes. The aggressive option has the highest exposure to equities and could provide the best returns. However, it also poses the highest risk. The moderate option has an equal mix of high-risk and low-risk investments, balancing your returns. The conservative option invests in moderate-risk to low-risk instruments and limits your exposure to equities. Young investors can start with the aggressive option, but older investors must follow the conservative approach to safeguard their future.
Returns from NPS
Since the NPS offers market-linked returns, the returns can vary over time. Assume you make a monthly investment of Rs. 1,000. Equity plans offer a three-year return between 18% to 20%. The returns on government bond plans range between 4% to 7%. Over the last three years, the returns from corporate debt plans have been between 6% to 7%, while the returns from alternate investments range from 4% to 9%.
The returns from NPS depend on your investment strategy. You can choose the active investment option if you have enough knowledge about the market. However, opting for the auto lifecycle option might be ideal if you want the system to allocate your funds and mitigate the risks. You can let the NPS fund managers invest the amount based on your age and investment strategy.
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