National Pension Scheme (NPS)

By January 9, 2019 Blog

Investment Query: The below mentioned article says NPS is good option now with relaxation on taxation and also mentioned need to look for alternative to large cap funds! Your suggestion please?,artid-67298628.cms?utm_source=newsletter&utm_medium=email&utm_campaign=ETwealth&ncode=cbf487a39d0c1805c0b139658c717f66

Mr. Gerard Colaco: I had a look at the article.  There are some good points.  Other points are utterly ridiculous.  I have no problem with the 1st point.  SIPs are always good.  The correct alternatives to large cap or large-cap index funds and not multi-cap funds as stated in point 2.  It is better to have a separate SIP into a mid-cap fund, or a fund that tracks a wider index at an acceptable cost.

The point about harvesting capital gains from equity mutual funds in point 3, is stupid.  In any investment, it is the objective that is important, not the tax.  For example, if a 30-year old is investing for retirement and, in the normal course, the funds will be required when he reaches the age of 65, it is the tax angle 35 years from now that will be important, not the present tax laws.  No one can predict how equity or other mutual funds will be taxed at that time.  Also, it is impractical to harvest capital gains on an annual basis.  Very few investors will remember to do this in a disciplined manner.

Where point 4 is concerned, switching to lower interest rates for loans is always prudent.  Point 5 is ridiculous.  I will not waste my time on it.

Points 6 and 7 are sensible.  Where point 8 is concerned, the NPS is certainly better than it used to be.  But I will NOT invest a single rupee in it so long as I am compelled to invest a portion of the ultimate redemption proceeds in an annuity.

Where point 9 is concerned, some international diversification is fine, but not through feeder funds because they are costly.  It is better to avail of the liberalised remittance scheme of the RBI and invest abroad directly.

The advice given in point 10 can be dangerous if the possible future implications are not properly explained.  For example an individual keeps investing in the names of the parents.  This builds up to a considerable amount.  After the lifetime of the parents, if there are other children who are legal heirs, they too can claim a share of this money, if no proper will has been made by the parents leaving particular investments exclusively to the individual who funded them in the first place.

Point 11 is okay.  There can be a benefit in paying health insurance premiums for two or three years if the discount is cost effective.


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