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Thursday, April 2, 2015

Investing in the new NPS is akin to marrying Katrina Kaif

Investing in the new NPS re launched with the budget 2015 is akin to marrying Katrina Kaif. Looks so inviting, but hold on. Given a chance, would you really marry Katie? Really?


Surfing through the television channels and nothing great to watch after the sad exit of the Indian cricket team from the world Cup, my hands suddenly got frozen on the remote control. What I was seeing was a gorgeous looking, stunning face on the television screen. Wearing a black saree, against the back drop of Egypt pyramids, an almost perfectly carved figure was dancing to the tune of 'Teri Ore...Teri Ore'  from the movie 'Singh is King'. I am sure that there are many who became Katie's fan after watching that song.

My wife had called me from the kitchen, while my eyes and ears and all other sense organs were glued to the television screen on that Sunday morning. I was unable to hear her noise (sorry voice), and this had its  obvious consequences, apparently visible over the next few weeks.

And this is exactly how the new NPS is for most of us. So many of our readers have come back to us virtually "demanding" that we give our consent to invest in the new NPS scheme now. It is so much more lucrative now. And there argument is no less relevant. They argue that what else we need to invest our money:
  • Risk free, government backed investment.
  • Decent returns.
  • And to top it all, the government has given a big boost to the National Pension System (NPS) by allowing a separate deduction of Rs 50,000 over and above the Section 80C limit of Rs 1.5 lakh (under Section 80CCD).

Well, this fatal attraction to get into the new Budget 2015 NPS scheme is no less than agreeing to a marriage proposal with Katrina Kaif. As inviting as it may sound, would you really go and marry her? For all the money, the fame, the looks she might bring in your life, you will still be wary of taking that decision, isn't it? Because when it comes to your life, more often that not, you tend to take a long term view of the consequences of entering onto a relationship.

But what about our investments? Do we really look at the long term relationship and consequences of investing our money? Why not think and analyse the above 3 distinct advantages of the new 2015 NPS scheme from a long term perspective and see if it still is really worth investing in NPS.

Risk free, government backed investment
Well, NPS is government backed pension scheme for sure, and the risk factors are truly very low. But so is EPF and PPF. For the moment, forget the taxation angle. We will come to that as well. But right now, we are discussing the risks involved. In fact, the NPS comes at a cost of worst liquidity of your money, and horrible returns whenever you exit the scheme.
Now, here is the key point. This is a debt based investment - just like EPF and PPF. Do not just blindly go and invest because it is safe or because it will save tax. First, you ought to find out whether you really need to put in more money in debt based investments. A ship is the safest at the harbor, but that is not what it is designed for. So, just investing for safety is a poor man's thinking. If you are 40 years old, and at least 60% of your money is not deployed in equity based investments, you are already losing on the returns of your portfolio. Any further exposure to debt will only further imbalance your portfolio.

Decent Returns
Really? 8 to 9% returns - you call it decent? Forget about all government data, and think what is the current annual inflation on education, vegetables, rents, and in general your cost of living. It is way into the double figures. So, being happy with 8 to 9 % returns is at your own peril. You will be losing money every year, in the true sense. And mark it here. The returns from NPS are fully taxable, unlike the EPF and PPF which work with EEE regime. The NPS actually works with EET regime. So, while one may get lured into marrying Katie, the exit is going to cost you heavily. All the entry benefits (and much more) are taken away at the time of exit of the NPS scheme. Worst, you cannot withdraw all the money you invested (which was supposed to be yours). As much as 40% of the money you put in, has to be mandatorily invested in government annuity schemes (which provide perhaps the worst returns)
Some readers also argue that though the exit is taxable, there is a good possibility that they would be in a lower tax bracket at the time of retirement. Well, I can only sympathize with such people because they are planning to retire poor. I would never plan my financial life that way.

Additional tax deduction
Now, if you tell me that you invest your money to save taxes, then this is the first blunder you do, and trust me, you are not alone. You should invest your money to get a good RoI on your money, rather than to save taxes. 
If you can get 15% return while paying 100% taxes as per your tax slab (thus reducing the effective returns to 13%), you should  still go for this option vis a vis getting 9% return and saving some money in taxes (thus increasing your effective return to 10%). Simple logic - 13% is much better than 10%. But then, you got to have the right perspective - to look at post tax returns on your investments, rather than blindly investing to save taxes.

So, in nutshell, I would still not give you a go ahead to invest in the new NPS unless you are already overshooting your equity allocation of 60% (for a 40 year old) in your portfolio and have already reached your limits of investing in PPF. Even after meeting the above 2 criteria, you may invest just to satisfy your inclination to follow the herd - nothing else.

While getting married to Katie may sound exciting and lucrative, think of your life over the next 10 years before you get into this long term commitment of marriage. 
It is just the same with NPS. The entry may look fascinating, but think of your life at the time of your retirement when you need your own money. You might just be able to make a wise decision because now you know that you will be taxed and paid back only 60% of your investment.

Cheers

Manoj Arora
Freedom can buy you.... what money cannot !!

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