New pension system
When compared to any other type of investment, the distinguishing feature of the NPS is the shockingly low cost. The annual cost of record-keeping is Rs 380, each transaction will cost Rs 6 and the most amazing of all-the investment management fee is 0.009% per annum. This alone destines the NPS to be the greatest thing that ever happened to the Indian investor. Why is low cost so important? Because the magic of compounding over the long time horizon of the NPS means that its beneficial impact will be magnified massively.
Here's a simple comparison. Let's say that there are two individuals, one of whom puts his monthly savings in the NPS and the other in a mutual fund. Let's further assume that these savings start off at Rs 1,000 a month and as the savers' incomes grow, they are able to increase their contributions by 10% every year. The mutual fund charges a load of 2% per investment and the NPS charges a 'load' (transaction cost) of Rs 6 per investment. Here's the important part: we are assuming that the investment performance is identical-both are running the same portfolio, which gains 10% a year. The only difference is that the management expense is 2.25% a year for the mutual fund and 0.0009% a year for the NPS.
After thirty years, the mutual fund investor would have Rs 55 lakh and the NPS investor Rs 79 lakh. That's a huge difference, and all of it results from lower costs. I haven't put Ulips into this picture because insurance companies' effective management expenses and load/commission information is so expertly obfuscated, but their returns are going to be far lower.
There are some downsides to the NPS too. The biggest is that it really is a pension scheme, not an investment. You can't withdraw the money till you are 60 years old, except for critical illnesses and for building or buying one house. Even at sixty, you can only withdraw as cash 60% of the corpus, the rest must be used to buy an annuity. That's not a bad thing by itself. There's another big disadvantage of the NPS, which is the gains will be treated as taxable. However, this is obviously a blunder on the government's part and one expects it to be corrected if the NPS is to take off at all. Either NPS gains will be made tax-free or, if there's a policy change in the offing then competing systems like the EPFO will also be made taxable.
Still, I fully expect those selling all rival retirement and pension 'solutions' to make a determined effort to badmouth the NPS. The NPS is so much better than whatever 'solutions' they are peddling that they just can't afford a fair comparison.
The author is CEO, Value Research
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