Should I Invest in NPS or Continue with VPF?

Ans: Every person should have mix basket of Investment with some portion of secured investment. PPF+NPS - still one of the best secured and constant growing investment avenue.

Ans: Analyzing Your Current Investments and Future Strategy
Overview of Your Investments
Your disciplined approach to investing at the age of 28 is impressive. Your current investments include:

Public Provident Fund (PPF): ?1,50,000 per annum
National Pension System (NPS): ?1,50,000 per annum
LIC Jeevan Anand: ?53,000 per annum
HDFC Balanced Advantage Fund: ?8,00,000 (lump sum)
Sundaram Aggressive Hybrid Fund: ?2,00,000 (lump sum)
SIP: ?5,000 per month
Compliments on Your Financial Discipline
Your commitment to a mix of retirement savings, insurance, and mutual funds shows strong financial planning. Investing early will help you build a significant corpus over time.

Evaluating Your Current Portfolio
PPF:

PPF is a safe and tax-efficient investment with guaranteed returns.
It offers good long-term returns but lacks liquidity.
NPS:

NPS provides market-linked returns and additional tax benefits.
It is an excellent choice for retirement planning with a mix of equity and debt exposure.
LIC Jeevan Anand:

This policy offers insurance coverage and savings benefits.
However, returns are generally lower compared to other investment options.
HDFC Balanced Advantage Fund:

Balanced Advantage Funds dynamically allocate between equity and debt.
They provide balanced risk and return, suitable for medium to long-term goals.
Sundaram Aggressive Hybrid Fund:

Aggressive hybrid funds invest predominantly in equity and the rest in debt.
They offer higher returns with moderate risk.
SIP of ?5,000:

Systematic Investment Plans (SIPs) in mutual funds are great for rupee cost averaging.
Regular investments help in building wealth over time.
Recommendations for Enhancing Your Portfolio
Increase SIP Investments:

SIPs offer the benefit of regular investing and compounding.
Increasing your SIP amount can significantly boost your long-term corpus.
Consider increasing your SIP by ?5,000 or more if your financial situation allows.
NPS Contributions:

Increasing NPS contributions enhances your retirement corpus with tax benefits.
However, it has limited liquidity and is locked until retirement.
Balanced Allocation:

Ensure a balanced allocation between equity and debt to manage risk.
Higher equity exposure is suitable given your young age and long investment horizon.
Review Insurance Policies:

Evaluate if your LIC Jeevan Anand policy meets your insurance needs.
Consider term insurance for higher coverage at lower costs, and invest the savings in higher return instruments.
Diversification:

Diversify your mutual fund investments across different fund categories.
Consider adding large-cap and mid-cap funds to spread risk and capture growth.
Regular Portfolio Review:

Periodically review and rebalance your portfolio based on market conditions and goals.
This ensures your investments remain aligned with your financial objectives.
Action Plan
Increase SIP Amount:

Boost your SIP in mutual funds to enhance long-term growth.
Start with an additional ?5,000 per month and increase gradually as your income grows.
Maintain NPS Contributions:

Continue with current NPS contributions for retirement planning.
Consider increasing contributions annually if you can afford it.
Review LIC Policy:

Assess the returns and benefits of your LIC policy.
If it’s not meeting your needs, consider switching to term insurance and reinvesting the difference.
Diversify Mutual Funds:

Add funds with different risk profiles to your portfolio.
This can help balance risk and reward.
Conclusion
You have a strong foundation with diversified investments and disciplined savings. Increasing your SIPs, balancing your portfolio, and regularly reviewing your investments will help you achieve your financial goals. Your proactive approach at a young age will ensure significant wealth creation over time.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: You have invested in VPF since 2008, and it has now grown to Rs. 64 lakhs. You are considering whether to continue VPF or start investing in NPS from scratch. Let’s analyze both options to determine the best approach.

Understanding VPF and NPS
VPF is an extension of EPF with tax benefits under EEE status, meaning contributions, interest, and withdrawals are completely tax-free. It provides fixed returns of around 8-8.5%, backed by the government. Withdrawals after 5 years are tax-free, making it a low-risk and stable option. However, it lacks equity exposure, limiting growth potential.

NPS, on the other hand, is a market-linked retirement scheme that offers a mix of equity and debt exposure. It has higher return potential (9-12%) but also comes with taxable withdrawals. Upon retirement, 40% of the corpus must be used for annuity, which is taxable. The extra Rs. 50,000 tax deduction under Section 80CCD(1B) is an added advantage, but NPS lacks liquidity as withdrawals are restricted until retirement.

Key Factors for Decision-Making
1. Compounding and Stability of VPF
VPF provides stable, tax-free compounding at 8%+ returns. Since you have been investing for 16 years, compounding is already working in your favor. The tax-free nature of both principal and interest makes it a highly efficient retirement tool.

2. Growth Potential and Risk in NPS
NPS has the potential to generate higher returns through equity exposure. However, it is also subject to market volatility. Additionally, the annuity requirement reduces flexibility, as a portion of the corpus is locked into a taxable pension.

3. Tax Efficiency and Withdrawal Flexibility
VPF is completely tax-free on withdrawal, while NPS has partially taxable withdrawals. If you start NPS now, the accumulated corpus will be small compared to VPF, reducing its impact on retirement planning. Since NPS funds remain locked until retirement, liquidity is limited.

Recommended Approach
Option 1: Continue VPF for Maximum Tax-Free Growth
If you want stability, predictable returns, and tax-free withdrawals, it is best to continue VPF. Your Rs. 64 lakhs corpus will keep compounding at 8%+, ensuring a risk-free retirement fund. Shifting to NPS would introduce market risk and annuity restrictions, which may not be necessary at this stage.

Option 2: Small Diversification to NPS for Tax Benefit
If you are looking for an additional tax benefit, you can invest Rs. 50,000 per year in NPS under Section 80CCD(1B). This will reduce taxable income while providing some exposure to equities. However, investing beyond this amount may limit liquidity and introduce unnecessary restrictions.

Final Insights
VPF is more efficient for retirement savings due to its tax-free nature, stable returns, and liquidity. NPS is suitable only for tax benefits, but the mandatory annuity requirement reduces flexibility. If needed, invest Rs. 50,000 yearly in NPS to optimize tax savings, but avoid diverting major funds from VPF to NPS. Continuing with VPF ensures compounding, stability, and tax-free growth, making it the better choice for retirement planning.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: Hello;

Interest on employee contribution to provident fund(EPF+VPF) in a financial year above 2.5 L is taxable after Budget 2021.

Hence it is recommended that you may divert your monthly investments into NPS tier-1 account.

You may select active choice and allocate maximum possible to equity and the rest between Govt securities and corporate bonds.

Note that withdrawals from NPS are highly restricted, before 60 age, being a pure retirement product.

The corpus accumulated in PF may be retained since it will continue to compound at the Interest rate.

Best wishes;