I was recently quoted in an article in New Indian Express (26Sep 2022) titled “National Pension System: Should you invest in Tier II account?”.
Here is the link to the online version of the article – Link
Here are a few of the points that I made in the article –
“We need to remember that NPS as a product has been made specifically for retirement. So even though NPS Tier II is not necessary for retirement savings, you can still use it for debt allocation of other long-term goals. If you look at the long-term returns of schemes G and C, it does seem like a good alternative to debt funds (though returns in the last 1-2 years have moderated substantially),” says Dev Ashish, founder, of Stable Investor.
Though many investors treat Tier II as an alternative to a savings account and bank FDs, that assumption is full of risks which may not seem obvious at first, says Ashish.
Tier II G & C schemes and NPS as a product are managed as a long-term instrument. “The money invested in schemes G and C of Tier II also goes into medium-long-term government and corporate bonds. There is obvious interest rate risk even if credit risk is limited. For someone looking to park the money in Tier II for the short-term, it means they are knowingly or unknowingly taking interest rate risk. This should be kept in mind and make sure you check the maturity and tenure profiles of the underlying bonds in portfolios of schemes G & C,” the financial advisor says.
If you have a short-term goal that you want to save money for then you already have simple FDs and a range of shorter-tenured debt fund categories that are better suited. Investors can go for those depending on the nature and criticality of your goal and your personal risk appetite.
“As for the long-term goals, where you should ideally have a higher allocation to equity, NPS Tier II doesn’t make much of a case as here too, you have better and more options available in the equity mutual funds. Depending on your risk appetite, you can vary your investments within equity but between market caps, segments, sectors and strategies. Something that is not possible with scheme E of NPS,” Ashish explains.