Thanks to the media everybody now knows about the NPS. At the end of training sessions people do ask…’Is the NPS suitable for me?”.

Well that is a difficult question to answer. Let me tell you for whom NPS is not suitable at all!

If you are young: If you are below the age of 45 years banish the thought of putting money in a fund with 50% of the corpus in debt products. The asset allocation ratio makes the product very inefficient. At the age below 45 you need to be at least about 80% in equities.

If you can spare only Rs. 6000 a year for retirement: If you can spare only Rs. 6k per annum for retirement, you should be looking at P P F rather than a NPS for your retirement plan. This is because of the cost structure of the NPS. It hurts small investors – and I am not blaming the scheme, I am just saying it is not suitable for you.

If you are not the DO _IT- yourself kind a guy: No great effort is made by the PFRDA to sell this scheme through ‘advisors’ – thus the quality of pre and post sales service will be of a lower quality and you may have to do a lot of that yourself.

If you cannot understand debt portfolio compositions: The equity portion of the NPS gets invested in an index fund, but the debt portion could get badly or poorly managed. You need to keep looking at the average maturity, quality of ratings, and the current and maturity yields of the portfolio.

If you do not trust the Government implicitly: If you do not trust the Government of India completely (i.e. there will be no frauds in the NPS fund management for the next 50 years at least!). This is because once you have started the scheme, you are wedded till death do you apart!

If you do not believe that LOW COST is more important than COMPETENCE: sadly even though there is a lot of literature on how funds with lower costs will out perform funds with higher costs, in the Indian context this is still to be proved. I have done a separate post on mutual fund costs, read it.

The people selling National Pension Scheme are not to keen to sell it (obviously because they do not earn any money), but the scheme will catch on. As soon as the scheme reaches an AUM of say Rs. 100,000 crores (frankly this will happen in 2014-15 is my belief) the government may even come up with some kind of a deferral tax!

Personally I have my money in direct equities, mutual funds and Public provident fund – no other debt scheme other than a bank FD. I will not be buying a NPS scheme because i do not like the high debt component and the fact that I HAVE TO BUY AN ANNUITY with the accumulated money. That of course is my personal view….

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  1. True Subra. I did that mistake of opening a NPS account as soon as I saw it. Regretting it now. But just to keep it going, I am going to put 6k every year, not a lot of money, but NPS is not my focus at my age of 30 years. I will think about this when I am at 40-45. Mutual Funds remains and will remain my most preferred choice of investment because equities have hurt me more than profit (that ofcourse is because of my illiteracy of the market).

  2. What’s the logic behind 6K per year for PPF?

    I would think if one had 72K per year to invest for retirement, he/she could choose PPF for 72K and anything else for amount greater than 72K

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