Why NPS doesn’t make sense!
If you can control your emotions, NPS ain't for you.
It’s March and it’s the time you think about your investments and Tax Savings the most. I came to know about NPS i.e. National Pension Scheme. In NPS, you can save tax up to 50,000 per year. This tax-saving attracts investors to put money in NPS.
On average, NPS compounds at a rate of 9%. You may argue it's 10% but fundamental maths remains the same.
I have done my maths and decided that I am better off — NOT putting my money in NPS. I will invest that money in Equity where I expect to get a 12% CAGR in the long run.
In NPS, 50k if compounds at a rate of 9% for 13 years.
- 50k *1.09¹³ =~ 153.2k = Approx 153k
In Equity, 15k will go away as tax, and the remaining 35k can compound at a rate of 12% for 13 years
- 35k *1.12¹³ = 152. 7k = = Approx 153k
Search query for google: “50 * 1.09^x,35 * 1.12^x”
As you can see, in 13 years, the compounded amount will be the same in NPS and in Equity. After 13 years, I can continue compounding at 12% if I am in equity and will be stuck with 9% if I am invested in NPS.
Hence, my conclusion is to stay away from NPS and invest on your own in equity.
Over a long time, simply put, higher compounding rate instrument wins! Hence, Stocks > MF > NPS
Also, NPS doesn't return you all of your money on retirement. It gives 40% to Insurance companies and then it is given to you in terms of pension.
If you are financially literate and know how to manage money, don’t invest in NPS
