Authored Article By – Mr. Sriram Iyer, Chief Executive Office HDFC Pension Management Company

We Indians believe in saving for the future. As parents, it is a common practice to create a corpus for funding important long term goals for the family such as buying a home and for milestones in the lives of our children such as their education, marriage, etc.

When it comes to planning for our own retirement, we mostly put it off for later as culturally we are used to relying on our families for support in old age. The concept of joint-family is almost non-existent now which makes it necessary for us to prepare for our golden years with an appropriate financial plan. There are various products available such as Employee Provident Fund, Public Provident Fund, Life Insurance, Mutual Funds, National Pension System (NPS), etc. Each comes with its own set of benefits and offers returns based on the investment platform chosen by the service provider. 

While there are multiple options available, it is necessary to understand each one well to ensure that we are able to use the various plans appropriately. The objective is to build a corpus that will generate income equivalent to our current earning while also keeping in mind inflation.

What are the things we need to keep in mind when it comes to building a corpus for retirement?

Start early & think long-term: Most financial instruments stress on the benefits of long-term investment. That is because long-term investments enable us to make the most of the power of compounding. If you save Rs. 50,000 per year for a period of 25 years – assuming a rate of return of 8% p.a. the corpus that would get created would be around Rs. 40 lakhs. If you start the same activity 5 years later, your corpus would end up at Rs. 25 lakhs which would be Rs. 15 lakhs lesser. Thus you can see the impact of time on the same investment. That is the magic of the power of compounding. Hence the sooner you start the better.

Choose an instrument that gives potentially higher returns: It is important to invest in vehicles that have the potential to beat inflation in the long term. If you stay invested in Equity (professionally managed basket of stocks such as Mutual Funds and NPS) as an asset class for the long-term, not only does the risk of capital loss reduce significantly with time, but the probability of earning double digit compounded returns goes up. If we were to take a time period from 1995 onwards and look at a passive basket of stocks such as Nifty 50 – for any 10 year time holding period, 3 in 4 times you would have made double digit returns per annum and more importantly, you would have never lost money. The odds improve even further if you were to choose an actively managed fund. Hence it is a good idea to opt for a product that gives exposure to equities such that the portfolio is geared to beat long term inflation.

Low charges: Fund managers levy charges on market linked investments. Given this, it makes sense to go for an instrument that has low charges. This enables you to maximise your investment. If your cost of managing money is higher by 1% over a 25 year time horizon, you will end up having a corpus that is 10-15% lower. In other words, by saving on the cost of fund management you could potentially build a corpus that is 12-15% higher, even at a gross compounding rate of say 8% p.a.

Lesser involvement: Managing investments in a scenario of market volatility requires a great amount of expertise. Also, it needs to be noted that with increasing age the exposure to equities needs to be reduced. Managing all of this dynamically is not easy for a lay person. A product that enables managing both market volatility as well as asset allocation with increasing age is a good choice for those who want to build a corpus in a safe and hassle-free manner.

Managing Behavioral biases: In order to make money from equity as an asset class, it is important to stay invested through market cycles and not succumb to the noise that you are surrounded by. A product that, by design, forces you to stay invested and keeps you committed to your retirement corpus building goal is a good way to manage human emotions and behavioral biases that comes in the way of long term wealth creation.

Tax Advantage: Tax advantage offered at different stages of the investment journey – on investment, on accruals and on redemption – is an important factor that will determine post tax returns. Different products offer different combination of Tax benefits. A product such as NPS or EPF offers tax savings/exemptions at each stage of the journey – at the time of investment (up to certain limits), On accrual and on maturity. This is also an important consideration to account for while deciding on the combination of vehicles.

Considering all of the above factors, one product that is designed to meets these requirements is the National Pension Scheme (NPS). It offers the features of:

1.    Choice of funds – Equity, Corporate Bonds and Government Securities and a combination of these basis your choice (in the Active choice option) or in an auto mode where allocation is pre-decided basis ones age and risk appetite (in the Auto choice option)

2.    Automatic rebalancing with age (under the auto choice option)

3.    Low charges (less than 0.10% – almost 1/15th  of the Fund management cost of other comparable actively managed funds)

4.    Benefit from the power of compounding by staying the course in the long term.

5.    Tax advantage : NPS offers significant tax advantages to Salaried employees under section 80 ccd(2): up to 10% of Basic (+DA, if applicable) salary can go towards NPS investment through the Corporate NPS route, thus not attracting tax that would otherwise be payable basis the slab that the employee would fall under. For non-salaried class, under the old tax regime an amount of Rs. 50,000 can be invested in NPS over and above the 1.5 lac that can be invested in Other Tax saving product.  NPS is the only product that qualifies for this under section 80 ccd(1b).

6.    Strong Risk management framework defined by PFRDA through clearly defined investable universe for Pension Fund Managers

7.    Close regulatory monitoring/supervision and course correction of Pension Fund Managers performance

You can choose your pension fund manager based on the returns that have been generated by them. The information is available easily on npstrust.org.in. Start early and make the most of your investments to live comfortably in your retirement years.