Investors should quiz them to understand the product, which options to invest in, and how to get the final payout
While investors have had the option of taking the help of distributors of various financial products such as mutual funds and fixed-income instruments, there was no support system they could fall back on while investing in the National Pension System (NPS).
Until now, they went directly to a service provider and completed the investment formalities themselves. This is set to change, with the sector regulator having notified the rules on retirement advisors.
Investors will have a set of intermediaries to assist them. However, the final responsibility will still rest with investors to ask their retirement advisors the right questions, and make the right decisions pertaining to their NPS investments.
How does NPS function? How is it different from other retirement options?
Most people who are looking at NPS to fulfil their retirement needs do not have a clear idea of how the scheme works. In the past, when they invested in a retirement instrument, they saw their money put into certain instruments, mostly debt-oriented, which then paid them a fixed rate of return.
That is how traditional instruments like the Employees Provident Fund (EPF) and the Public Provident Fund (PPF) work. However, the NPS is different because it offers investors the freedom to choose from multiple types of funds and fund managers.
It is also significantly different in the way it operates and in how it allows investors to use it. Many people use traditional retirement options like a temporary savings account from which they keep making periodic withdrawals. In the case of NPS, access to the corpus will be limited, which is why it is essential that investors acquire thorough knowledge of how the product works before putting in funds.
What is the right exposure for me? How should I invest in the NPS?
Since the NPS offers multiple options, including investing in equities, investors have to make several crucial decisions at the time of outting in money. They need to select the types of funds their money will get invested in, and also the proportion in which it will be divided among them.
Retirement advisors should be able to help investors make the right choices based on their risk appetites. Investors also need to decide how they should make their contribution - through a single instalment or regular, multiple contributions spread throughout the year.
Not only should the retirement advisor be able to guide the investor about how to make the contribution, she should also set up a system so that the individual is able to do so without any trouble.
Hand holding by the retirement advisor should be able to set at ease any worries the investor has regarding her investments and the processes to be followed. This is often where investors fail when they set out on their own. Without any help, they simply give up rather than make the extra effort to make this investment.
How are the various options performing?
A big black hole in the entire NPS investment process is knowing the results, that is, how the funds where the money has been invested are performing. There is no way an investor, especially a small investor, can keep track of what is happening to her investments. Unlike other investment options, data is not available in an easy-to-understand format.
Sometimes access to data is also a problem. This situation can be easily overcome if the retirement advisor makes this information easily accessible to the investor, so that she can see it whenever she needs to. Doing so will allow the investor to monitor her investments properly. This will help plug a big gap in the process and also build the confidence as the investor will know exactly what is happening to her investments.
Can I set the system on auto pilot? Can I make the investment process easy?
The NPS offers an automatic or default option to investors, which can do many things on their behalf. This option regularly rebalances the amounts allocated to the different investment options. This rebalancing is done each year based on the age of the investor. The allocation to equities is reduced as the person ages. It thus takes care of the important aspect of where to invest.
Similarly, a system can be set up for regular monthly investments through direct debiting from the investor’s bank account, so that she does not have to remember to make the investment each month.
Other areas like intimation of details of the investment can also be set up. The investor should ask the advisor to send her regular reports. People who want to know how the seven fund managers are performing, so that they can shift to a better-performing one if they wish to, should also get their retirement advisor to send them information in this regard.
How should I deal with the investment after retirement?
A key aspect of NPS is that there is a systematic way in which the payout is made once a person has stopped working. The investor needs to understand from the retirement advisor the process of taking an annuity and withdrawing the lump sum amount.
Investors should clearly know the time period before retirement when intimation has to be given for the monetisation of their corpus in NPS and the process to be followed for this.
The investor should not end up in a situation where because certain steps were not taken, a default option gets exercised, which then leads to cash flow problems and creates conditions that are not to the investor’s liking.
Arnav Pandya is a certified financial planner
The helping hand
- Advisors can answer investors’ queries and explain the scheme in detail
- They can help with risk profiling and help investors to get the right mix of equities, corporate debt and government securities
- The data from NPS is not readily available. Advisors can help investors monitor performance of their investments
- For those who cannot devote much time, the retirement advisor can set up an easy system of investing
- The retirement advisor can guide the investor in receiving the payout in a manner that suits him
Photograph: Christian Hartmann/Reuters