NPS Has Given 60% Returns In 1-Year, Should You Invest?

As long as our personal finance goals are concerned, planning for retirement also must be started as early as possible for cheering a peaceful retirement life. When it comes to retirement planning, some factors come to our mind, whether you are salaried or non-salaried such as investment plans, income source, expense pattern, savings habit and even risk. A retirement plan is a form of investment strategy that allows you to pile up a portion of your earnings across a long period of time in order to generate returns that satisfy your daily expenditures.

As investments for retirement are long-term oriented, there are a plethora of schemes to bet. As a result, the National Pension System (NPS) is a government-backed scheme that may help you to outperform inflation over the long-term. This scheme has generated 1-year returns of around 60% which no doubt have outperformed the returns of equity mutual funds, EPF and PPF. So let's discuss the past 1-year returns of NPS and discuss whether you should invest or not.

NPS Tier-1 Returns

LIC Pension Fund has generated the highest returns in the Tier 1 Account of NPS, with 59.56 per cent, followed by ICICI Pru Pension Fund with 59.47 per cent and UTI Retirement Solutions with 58.91 per cent. Tier 1 of the NPS is a basic account and only after establishing a Tier 1 account you can initiate a Tier 2 account. Individuals of all backgrounds are welcome to establish an NPS Tier-1 account. NPS Tier 1 contributions are tax-deductible up to Rs 1.5 lakh under Section 80 C and an additional deduction of Rs 50,000 under Section 80 CCD (1B) of the Income Tax Act of 1961. The NPS Tier 1 account has a lock-in period of 60 years. So, based on this and the previous year's performance of NPS Tier-1, which is shown in the table below, you may place your bet.

Scheme E Tier-I
Pension Funds	AUM In Rs (Cr)	NAV	1 year returns	3 year returns	5 year returns
Aditya Birla Sun Life Pension Management Ltd.	134.3	16.6096	50.99%	13.06%	NA
HDFC Pension Management Co. Ltd.	8,020.07	30.9763	57.37%	14.61%	15.32%
ICICI Pru. Pension Fund Mgmt Co. Ltd.	3,358.17	40.8469	59.47%	13.81%	13.96%
Kotak Mahindra Pension Fund Ltd.	657.44	37.457	55.53%	13.44%	13.93%
LIC Pension Fund Ltd.	1,657.48	25.8288	59.56%	12.63%	12.78%
SBI Pension Funds Pvt. Ltd	6,218.67	34.0406	53.49%	12.80%	13.52%
UTI Retirement Solutions Ltd.	960.36	40.3413	58.91%	13.30%	14.04%
Benchmark Return as on 04/06/2021			59.35%	14.78%	15.08%
Source: NPS Trust

NPS Tier-II Returns

Tier II of the NPS is a voluntary account or add-on account, whereas Tier I is compulsory to open. These accounts will have a three-year lock-in term. The NPS Tier II Account Scheme E has produced double-digit returns over the last year. Tier 2 accounts have no lock-in period. Tier-II accounts are open to all Indian citizens. Additionally, the scheme provides no tax breaks to the private sector or self-employed persons. A government employee, on the other hand, can claim tax deductions of Rs 1.5 lakhs under Section 80C if the account is opened for a lock-in period of 3 years. Check out the following NPS Tier II Account Scheme E returns as of June 4, 2021:

Scheme E Tier-II
Pension Funds	AUM In Rs (Cr)	NAV	1 year returns	3 year returns	5 year returns
Aditya Birla Sun Life Pension Management Ltd.	13.32	16.5238	51.01%	12.99%	NA
HDFC Pension Management Co. Ltd.	368.1	26.742	57.26%	14.51%	15.36%
ICICI Pru. Pension Fund Mgmt Co. Ltd.	170.61	32.3085	59.43%	13.92%	14.05%
Kotak Mahindra Pension Fund Ltd.	47.01	32.9585	54.78%	13.25%	13.78%
LIC Pension Fund Ltd.	65.7	21.5965	59.76%	12.84%	12.77%
SBI Pension Funds Pvt. Ltd	250.1	31.4896	54.24%	12.92%	13.60%
UTI Retirement Solutions Ltd.	49.02	33.1986	60.43%	13.88%	14.36%
Benchmark Return as on 04/06/2021			59.35%	14.78%	15.08%
Source: NPS Trust

Should you invest?

Because it is a long-term strategy, you must register an NPS account in your working years or as soon as possible in order to get the entire scheme benefits when you retire. The risk element related to NPS is one of its most critical characteristics as it enables allocation to equities, government bonds, and corporate bonds. Once you retire, you can withdraw a portion of your pension fund as a lump sum, and the remainder can be used to purchase an annuity in order to get monthly pension benefits which are only determined by the outcome of your NPS investments or pension funds.

Over the last year, the equity market's returns have been driven by strong gains in equity, as a result, the performance has benefited the National Pension System's (NPS) equity scheme, Scheme E, tremendously. And by considering the long-term nature of NPS investments, we would suggest those investors to invest in NPS Tier 1 scheme who are ready to lock-in their investment and have higher exposure to equities. That being said, past performance should not be the only justification to invest in NPS. Allocation to equities can be a good bet for retirement savings since it helps you overcome inflation over time, but only if you are a conservative investor. But those with a risk-averse attitude can still stick to EPF, PPF, SCSS and PMVVY to create a secure retirement corpus.  

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