Indian investors flock to NPS to ride economic, equity market storm

Indian investors are charting a new course for the relatively calmer waters of pension plans as they ride the waves of economic uncertainty, geopolitical turbulence, and erratic stock market behaviour. These “safe harbour” asset classes are becoming increasingly popular because of their intrinsic stability and the wide range of advantages they offer.

Assets managed by the National Pension Scheme increased a sharp 22 per cent during the fiscal year 2022-23 (FY23), from Rs 7.16 lakh-crore in March 2022 to Rs 8.72 lakh-crore in March 2023, a 22 per cent increase.

The non-government sector reported a record NPS enrollment of one million new subscribers within the financial year alone, driving this significant upsurge through an influx of new investors and continuous contributions from existing ones. These patterns demonstrate how attractive pension funds are in the current economic environment.

Tax incentives

The appeal of pension plans is not without reason. Investors are attracted to these programmes because they offer significant tax incentives. The NPS provides for an extra deduction of Rs 50,000 under Section 80CCD, while contributions up to Rs 1,50,000 are eligible for tax deductions under Section 80C of the Income Tax Act. It allows employers to contribute up to 10 per cent of basic pay plus dearness allowance, creating a win-win situation for people receiving a wage.

Pension funds also have meagre fund administration fees, varying from 0.03 per cent to 0.09 per cent annually, making them cost-effective. The final investment corpus is significantly increased because of this low cost, improving investment allocation and leading to cumulative cost savings over time.

Speaking to The Federal, Shyamsundar Baliga, CEO of Kotak Mahindra Pension Fund, emphasised that NPS schemes have a strong track record of performance while referring to the consistent returns these schemes have provided. Tier-1 equity schemes returned 12.7 per cent yearly during the previous 10 years, compared to 8.4 per cent and 8.6 per cent for tier-1 government securities and tier-1 corporate debt strategies, respectively. This suggests that an investor who had invested equally in government securities for stability and stocks for growth would have had more than 10 per cent annual returns throughout this time.

Depending on their risk tolerance and objectives, people can diversify their assets across several asset classes. Baliga emphasised the significance of stocks in any portfolio and recommended an allocation of up to 75 per cent for the best growth. He also suggested strategically allocating funds to debt-reduction plans to maintain stability and balance.

He claims that a methodical approach to saving in NPS, with nearly equal allocations between stocks and government assets, is a wise course. He added that the returns from these programmes are also very competitive compared to other retirement products like PF (8.15 per cent), PPF (7.1 per cent), and even other savings tools like mutual funds and insurance.

Guaranteed returns

Recent changes in investor profiles and the demand for safer asset types in India have increased the focus on pension plans. The Pension Fund Regulatory and Development Authority, headed by Chairman Deepak Mohanty, is preparing a pension plan with guaranteed minimum returns as a reaction to this changing financial landscape. This idea was revealed during a media briefing last week.

The COVID pandemic increased the importance and acceptance of pension funds. Even after it has passed, interest in pension plans continued to soar due to the government’s adoption of various pension-granting programmes for families who lost earning members due to the crisis, leading to a considerable rise in investments in these assets.