INVESTING FOR SHORT-TERM GOALS: NPS Tier II can be a better bet than hybrid mutual funds
While individuals are increasingly investing in hybrid mutual funds, they can look at a Tier II account of National Pension System (NPS) which invests in both equity and debt, has no lock-in at all, and the expense ratio is significantly low making it the lowest-cost pension product available in the country. This voluntary savings facility is available as an add-on to any Tier-1 account holder and investors can select different pension fund managers for Tier I and Tier II accounts to diversify the money across fund managers.
A Tier II NPS account can help an individual to meet-short-term goals. With higher internal rate of return and low account maintenance fees, the account can help an investor to accumulate a sizable pension wealth at the time of retirement. It provides an auto-choice option for asset allocation for those who do not want to manage the asset allocation themselves and an investor can opt for a maximum investment of 75% in equity. In active choice, the subscriber will have to choose the investment option himself as per his preference and should have adequate knowledge about markets and interest rate movements.
However, investors must note that there are no tax benefits on investing in the Tier II NPS account for private sector employees. The tax benefit is available only to central and state government employees and there is a three-year lock-in period for them if they wish to avail tax benefits. In a Tier I account, a subscriber can claim tax benefit of Rs 1.5 lakh under Section 80 and an additional deduction of Rs 50,000 under Subsection 80CCD (1B) of the Income Tax Act.
In case of a Tier II account, the subscriber will have to pay tax as per the marginal tax rate applicable to him on the returns
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