Published on December 21, 2023 / By M. Pattabiraman Twitter: @pattufreefincal
Published: December 21, 2023 at 6:00 am
A reader asks, “For those who don’t have a compulsory NPS deduction at the workplace, what would be a good option? a. aggressive hybrid fund. b. nifty 50 ETF+ conservative hybrid fund+/- gold ETF or c. nifty 50 etf + gilt fund +/- gold ETF?”
Regular readers may know that we have always recommended against investing in the NPS if one has a choice. The primary reason is the strict exit clause, where one has to wait until 60 to avoid losing 80% of the corpus to an annuity. This is unsuitable for almost all corporate employees.
Even for those with mandatory NPS, we recommend using it as a debt mutual fund and investing in equity elsewhere. We believe the NPS in its current form is not good enough to be the dominant product in a retirement portfolio.
Case 1: For those who do not have mandatory NPS and are several years ways from retirement:
- Use an equity index fund for 50% to 60% of the portfolio.
- For the rest, use a PPF or EPF if you have it. No need for PPF if you have mandatory EPF.
- Down the line, you can add a long term debt fund like a corporate bond fund or a gilt fund, or a conservative hybrid fund like Parag Parikh Conservative Hybrid Fund
- Have a precise asset allocation and risk reduction plan. The freefincal robo advisory tool automates this part for you (among other things).
- You can diversify your portfolio with the ideal retirement portfolio a few years later.
Case 2: For those who have mandatory NPS and are several years ways from retirement:
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- Use NPS as a debt fund. The default allocation (for govt and PSU employees) of 15% equity and the rest in bonds (mostly gilts) should do.
- Build a sizeable equity corpus using index mutual funds. The remaining steps are as above.
Case 3: For those who opened an NPS account independently for tax saving
- Switch to the direct tax regime, forget about saving tax and focus on building wealth. Keep the NPS account alive until eligible for exit by investing the bare minimum. Rest of the steps as in case 1 above.
Case 4: For those who opened an NPS account independently for retirement planning
- If you insist on keeping the account alive, see the recommendations for cases 2 and 1 above (in that order).
- If you are okay with keeping it running with min contributions, see cases 3 and 1 above (in that order).
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Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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