National Pension Scheme offers investors a low-cost avenue to save for retirement

Does retirement planning mean simply putting surplus funds into a well-guarded piggy bank and never looking at it till one reaches the age of 60? How should an investor plan his/her retirement through regular investments or via cautious savings?And the bigger question: why should I sacrifice today to fend for tomorrow? These are never-ending questions, with no definite answers. The key point to understand is that proactive investors can make judicious investment decisions throughout their life span to create a savings pool, which comes handy post retirement.Irrespective of the lifestyle, work profile or financial commitments, it is imperative that an investor has a strong corpus to finance his/her post-retirement needs. Building such a corpus calls for meticulous planning on the part of investors, that, too, across their lifespan.The National Pension Scheme (NPS) provides investors across age groups (18-55) a lowcost avenue to do financial planning. Under NPS, an investor can start with an amount of Rs 6,000 annually and at the same time take exposure to multiple asset classes. The scheme would invest via professional fund managers and also provide tax benefits.The Pension Fund Regulatory and Development Authority (PFRDA) opened this scheme for the general public in 2009. Having been in existence for over two years, the performance so far reflects that NPS has delivered returns higher than traditional saving instruments like corporate bond funds and government securities funds.If this performance continues over longer time frames, then it can help generate sizeable corpus for retirement savings. Such performance clearly indicates the usefulness of the scheme to generate higher inflation-adjusted returns for a safe and secure retired life.NPS is a savings-cum-investment alternative, which gives investors the best of both worlds. While it offers investors flexibility in terms of the amount they wish to invest, it also gives them an opportunity to diversify investments into different streams. Investors, based on their risk-bearing capacity, have the discretion to allocate funds towards any of three asset classes . E (equity), C (corporate bond fund) and G (government securities fund).The risk-return tradeoff is as follows: E - high risk and high returns; C - medium risk, moderate returns; G - low risk, low returns Investors can seek a choice of six fund managers to make their investments as well as switch across fund managers.This ensures an element of competition between fund managers and helps the scheme generate market-linked returns. Investors can either choose the asset class/classes they want to invest in the desired proportion or choose the auto choice or lifecycle fund scheme by default.Here, at the lowest entry age (18 years), the asset allocation would be 50% in E, 30% in C and 20% in G till the investor turns 35. The ratio of investment in E and C will then decrease annually, while the proportion of G will rise. At 55 years, G will account for 80% of the corpus, while the share of E and C will fall to 10% each.