Should I switch from debt funds to NPS?

By Morningstar |  09-10-20 | 

I am earning pathetic returns from debt mutual funds. Is it better to invest in bank deposits or in NPS for the long term?

Fixed-income instruments are relatively less volatile than equities, and lend stability to the portfolio and protect against purchasing power erosion due to inflation. Investments in fixed income instruments / debt funds are typically subject to interest rate risk and credit risk.

Yields have fallen substantially, particularly at the shorter end of the yield curve. The sharp fall in yields has in fact benefitted most debt funds, given the inverse relationship between interest rates and bond prices. However, for new investors coming in the yields are relatively lower than those prevalent earlier.

You should evaluate the performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one.

Banks too have cut down on their deposit rates in line with the sharp fall in market interest rates. Interest from bank deposits for longer holder periods (>3 years) are taxed at marginal rate, compared to a favourable tax rate of 20% post indexation of costs in case of debt mutual funds.

The National Pension Scheme, or NPS, is considered as a long-term investment vehicle for building a retirement corpus.

It offers two choices:

  • Active Choice: This option allows the investor to decide how the money should be invested in different assets.
  • Auto choice or lifecycle fund: This is the default option which invests money automatically in line with the age of the subscriber.

The Active Choice offers three funds or investment options:

  • Asset Class E (invests 50% in stocks)
  • Asset Class C (invests in fixed income instruments other than G-secs)
  • Asset Class G (invests only in G-secs)

An investor can choose one of these funds or opt for a combination of them. One may opt for a 100% fixed-income option under the 'Active choice' option. However, the NPS also invests in the same universe of corporate bonds, government securities (G-secs), and other debt market instruments. Hence, would fetch similar yields as those in mutual funds.

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ninan joseph
Oct 10 2020 06:48 PM
 Just to add on to earlier comment. Place your capital in FD with Bank, seek quarterly interest and use this amount every quarter to NPS as your contribution. By doing this you are in fact diversifying a little by FD (capital protection) to NPS which is a retirement fund. Do not touch this FD at all. You can put in 4 contribution into NPS as this the minimum requirement.

Alternatively, place the money in FD and use the quarterly interest into Index ETF.

By doing this your capital is safe and if you are exposed to equity as well.
ninan joseph
Oct 10 2020 06:43 PM
 Is your debt mutual fund giving you a minimum of FD rate + 2 or 3 percent. This is the minimum benchmark you should get as you are investing in a relatively higher risk fund than FD. If you are confident of this - go ahead and be invested in MF if not, if you are ok with 7% rate of return which will increase to 7.50 to 8% on a yeild basis if you are invested in FD. People try to scare you with tax benefit. If you are below the treashold level, give form 15G and you will not be getting any TDS cut. On the contrary if you fall in the higher tax bracket, in any case you will be filing tax returns and will be getting back the refund.

With regard to NPS. This is truly long term. You need to wait until you are 60 to reap the benefits. Apart from this this is truly diversified in equity, bonds and gilts. You cant get anything better than this and to top it the charges and fees are nominal. It is for this reason that there is no advertisement or media channel do not try to sell this. There is no commission for them. NPS is truly the 401K of US (If i may compare). Just to give perspective, I have invested in NPS since it started and during the march collapse, my portfolio was showing negative of 2% when the market crashed almost 30%. This was mainly because of long term nature of investment and diversification into bonds and gilts. You should be having NPS in your scheme and you get tax advantage as well.

To conclude, if your get 9 to 10% from debt MF, then it is worthwhile if not go back to FDs which is fully capital safe and YOU SHOULD HAVE NPS IN YOUR PORTFOLIO. THIS ACCORDING TO ME IS A MUST.
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