Tuesday, 16 April 2013

National Pension System Vs PPF: Which is better?

In an interview to CNBC-TV18, personal finance expert, Sumeet Vaid of Ffreedom Financial Planners discussed about various aspects of National Pension System and Public Provident Fund.

Below is the verbatim transcript of Vaid's interview with CNBC-TV18.

Q: The National Pension System (NPS) is fetching near double-digit returns, which is at least a percentage point higher than what Employees' Provident Fund (EPF) or Public Provident Fund (PPF) offer. Will this trend continue and is it a one year wonder because of the stock market is doing well. How should investors approach the NPS vis-à-vis PPF and EPF?
A: I think NPS is going in a great direction; it is the right direction in which it is going. However, still early days for NPS. They are building their track record in terms of fund management. The basic unique selling point (USP), which NPS provides vis-à-vis other investment options -- accumulation stage of retirement fund, cost of fund management is very low and one do not have that option of accessing that kind of cost anywhere else and those are the advantages, which is reflecting in the performance of underlying NPS. However, when comes the question of comparing EPF, PPF with NPS, it is no-brainer as of now.

Also Read: UK Sinha Warns Investors Of Fraudulent Schemes

Go in for PPF and EPF but keep a watch on NPS and environment will become much clearer in terms of action once the new tax regime, which has been talked about comes out in which the exempt-exempt-tax regime, which one has been looking forward to, comes then the situation becomes slightly different. However, as of now it’s in favour of EPF, PPF but keep a watch on NPS.

Q: Should you compare the NPS to some of the mutual funds because that is where the tax treatment seems to be more aligned?
A: That is right; NPS should be compared with mutual funds because money is being managed by some of the same fund managers under the asset management company structure itself. As I mentioned earlier, the cost is one big advantage in favour of NPS. The cost being paid is very low, it is one of the lowest cost of managing retirement point in the world is in India and that is they have done very well.

 One more thing, which one need to keep a watch on is the pension bill. It needs to get approved in the parliament because Pensions Fund Regulatory and Development Authority (PFRDA) getting a statutory status will pickup pension industry in terms of product development in times of companies coming in with specific product. However, as a starting point NPS is good compared to mutual fund but what one does not get in NPS is intermediation available; there are very few advisors or planners who are able to advice that.

Q: If you have to advice someone on asset allocation for retirement, would NPS have a place?

A: No. I will still wait for some more time because for me it is still early stages and the biggest challenge in NPS is servicing. The client servicing is a big challenge. They are still not clear how to do it because the intermediation costs are not built into that.

Caller Q: I have invested in three ULIP schemes, should I switch to mutual funds?

A: I would say that always buy insurance do not invest in insurance and if you have to invest, invest in mutual funds or other investment products. Insurance is an expense and investment has to be in non-insurance product over a longer period of time. In this current scenario because you have been paying premium for four year, you have to evaluate each and every policy and see the impact on the surrender value. There is no point incurring cost, there is no point incurring losses at this point of time.

If the losses are high or the surrender charges are very high then our advice is be to stay Put, do not redeem, do not stop, go on for two-three-four year more cycle, make sure you are able to take decent returns out of the policy and then switch. Having said that the basic thumb rule, which we always advice people is investing in mutual fund for long-term is much better, much less costly than investing in long-term for insurance provided you understand.



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