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The best way to plan for retirement is to invest funds in schemes dedicated to retirement, such as NPS. Ensuring your retirement corpus is secure and growing steadily can help you enjoy your retirement without any financial stress.
Today, you can choose from several retirement schemes that give you a substantial retirement corpus on maturity. Among these is NPS, or National Pension System – a government-backed scheme accessible to individuals across the country.
Under the purview of PFRDA, the amount you invest in NPS gets pooled with that of other investors. These funds are then managed by fund managers who invest the money in shares and securities as per the risk tolerance you mention at the time of investment.
To learn more about the benefits that make NPS a great investment option for your retirement, read on.
Tax Benefits
The tax benefits that NPS offers are one of the major reasons for its growing popularity. Under the scheme, you can get tax benefits through deductions under sections 80CCE and 80CD of the Income Tax Act. Under these sections, you can get a combined deduction of up to ₹2 Lakhs.
This deduction can reduce your overall tax liability, allowing you to invest that and further plan for your retirement. In addition to this, you can also get tax benefits on partial withdrawal, purchasing an annuity on maturity, and a lump sum withdrawal.
Flexibility in Allocation
As mentioned, the funds you invest in NPS get pooled with other investors’ money and then invested by PFRDA-regulated fund managers. The money you invest is invested in equity, debt, and other assets per your risk preference.
The returns you earn depend on the NPS interest rate, which depends on a few factors, including your risk preference and economic conditions. This makes the scheme a market-linked long-term investment, having the potential of better returns than fixed investments.
Moreover, you can change the allocation during your investment period if the fund underperforms. This gives you flexibility and control over your investment to align it with your investment goals and risk preference. Doing this further enables you to maximise your returns and keep your retirement growing securely.
Power of Compounding
As mentioned, the returns you earn depend on the NPS interest rate. Given that it is a market-linked scheme, the interest rate varies. However, your investment is distributed in different asset classes, managing and minimising the volatility.
Moreover, since it is a long-term scheme, the probability of you earning better returns increases. In addition, the pension scheme has a compounding effect wherein you earn returns on the accumulated wealth (investment + previous returns).
Due to compounding, you can secure a better retirement corpus and have a comfortable retirement. Additionally, the associated charges are low, allowing you to save more and add to the investment amount, ultimately enjoying better returns.
Low Risk and Affordable Scheme
As mentioned, the amount you invest in NPS gets allocated into different classes, which mitigates the overall risk. The risk mitigation occurs naturally and dynamically. For instance, one class may underperform and the other may not. As such, it allows you to mitigate or reduce the loss.
Moreover, the risk exposure of your investment reduces gradually, and as such, the risk also reduces. Additionally, the investment requirement of NPS is low and flexible. This gives you more control over your finances, allowing you to increase or decrease annual investment as per your preferences.
Well Regulated and Secure
In addition to the fact that the risk gets minimised as the investment tenor goes on, NPS is a government-backed scheme. This means that your investment amount and the returns you earn stay secure.
Additionally, the scheme is under PFRDA (Pension Fund Regulatory and Development Authority). This ensures that your funds get managed professionally and transparently. This, in turn, keeps you aware of your investment, allowing you to enjoy a stress-free investment experience and retirement.
In addition to the above, NPS also offers the option of portability. Under this, if you shift to a new job or a location, you can port your investment accordingly. This allows you to keep your investment intact and earn returns securely.
Now that you know why NPS can be a great way to plan your retirement, invest as per your finances and risk tolerance. This will help ensure you do not strain your current finances while planning for the future.
You also need to keep in mind that you diversify your investments. This means you should invest in different types of investments, including fixed-income and asset-class investments such as gold, mutual funds, or fixed deposits.
This will help mitigate the risk and also inject liquidity into your portfolio. As such, the funds are accessible when needed, and you do not need to overburden your finances, especially during emergencies.
