- Date : 06/02/2023
- Read: 6 mins
Learn whether shifting corpus from PPF to NPS could help your investment grow. Know how to move assets to equity funds for a better future.
Is Shifting Corpus to Equity Fund a Good Investment Strategy?
Do you want to shift your lump sum amount from a low-return investment option (such as PPF) to a better growth investment instrument like an equity fund (such as NPS)? If yes, you should first know whether shifting corpus would be a good investment strategy.
It is essential to know that allocating to Equity with a long-run investment horizon of 15 to 20 years or more can provide you with higher returns. However, any investment strategy involving equity funds comes with risk factors. This is because they are market linked. Therefore, if you plan to move your corpus from a fixed but low-return asset class (say, PPF) to an equity fund (like NPS), you should always consider the risks involved.
If you look at the figures, you’ll find:
- Annualised returns of NPS (National Pension Scheme) in the last few years have varied from 9% to 16%, depending on your chosen scheme.
- PPF (Public Provident Fund) is giving a fixed return of 7.1% from Q2 2020.
The above figure shows that investing in NPS will give you 2-9% more return than PPF. However, the risk of investing in market-linked equity funds or stocks is higher than that of fixed-income assets.
Are you ready to shift your corpus to an equity fund for higher returns? Shifting investments from PPF to NPS can help you get higher returns and enjoy tax benefits.
If you are okay with the risk associated with an equity fund and want to lessen the risk through systematic investment, shifting corpus to NPS is the best decision you can make as a long-term investment strategy for your retirement. You can gain more long-term by allocating more to equity funds.
If yes, let’s explore the things you should consider while shifting your corpus from PPF to NPS. While moving your corpus to equity funds, here are a few things you should keep in mind:
Staggered Investment Strategy
Suppose you have created a corpus of ₹ 20 lakhs in your PPF account over the last 15 years. Now, you have three options:
- Option #1: You can invest in PPF for an additional five years and keep earning the low-interest rate.
- Option #2: You can close the existing PPF account, open another PPF account, and keep investing in it for another 15 years to keep earning a low-interest rate.
- Option #3: You can move your corpus to an equity fund like NPS to get higher returns over the long run (say, 15-20 years down the line).
If you are eager to get more return by agreeing to take the market risk, you should go for the third option. Adopting a Staggered Investment Strategy can reduce the risk of investing in the equity fund.
Instead of investing the corpus of ₹ 20 lakhs at once, you can spread the investment over 12 months, 24 months, or, at most, 36 months.
You can invest your ₹ 20 lakhs corpus in NPS in a staggered manner by investing:
- ₹ 1,66,666 per month for 12 months
- ₹ 83,333 per month for 24 months
- ₹ 55,555 per month for 36 months
This staggered investment strategy will have two beneficial effects. It will:
- Reduce your investment cost
- Reduce your risk of investment
This is because this strategy uses the dollar-cost-averaging or Rupee Cost Averaging (RCA) method. So let’s try to understand it better.
The risk associated with an equity fund like NPS is more than PPF or any other fixed-return asset. However, you can average out the risk factor of an equity fund through systematic investment. Investing through SIP (Systematic Investment Plan) helps you take advantage of the Dollar Cost Averaging (DCA) or Rupee Cost Averaging investment method.
An investor should invest a certain amount of money (say, ₹5,000) at fixed intervals (say, Day 21 of every month) over time in equity funds or stocks. This means you would:
- Buy more shares of a company or units of an equity fund when the prices are low
- Buy fewer shares or units when prices are high
Equity funds can provide you with higher, low, or even negative returns in the short term. However, suppose you consistently invest in equity funds like NPS in the long run through SIP. In that case, your return will be higher than any other fixed-return asset. So, consistency in investing over the long run is the key to your equity fund’s success.
The DCA method of investing is a favourite practice of Warren Buffet, a billionaire, Berkshire Hathaway CEO, and one of the wealthiest persons on earth. He learned this investment strategy from his mentor, Benjamin Graham. If you are not a full-time trader, you should invest in an equity fund through the Dollar Cost Averaging method or staggered investment strategy.
That’s why Warren Buffet once said:
“If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”
Invest more in Equity
If your investment duration in an equity fund is 15-20 years or more, try to allocate around 75% of your corpus to equities.
While doing this, remember that withdrawal restrictions will be applicable.
- When you reach 60 years of age, you’ll be able to withdraw just 60% of your NPS corpus (which you would accumulate over the next 15-20 years or more). The remaining 40% of the corpus can be used to buy annuities.
- A partial withdrawal facility of NPS is available only when there are certain special circumstances, such as:
- Your child’s marriage expenses
- Your child’s education
- Medical expenses
If you are not comfortable with the withdrawal restrictions of the NPS, you may invest in Flexi-cap funds. NPS invests primarily in large caps. However, in the case of Flexi-cap funds, they invest in mid-caps and small caps, too, in addition to large caps. Therefore, the Flexi-cap funds may give you a slightly higher return than NPS.
If you are not comfortable investing 100% of your corpus in Flexi-cap equity funds, you may invest in aggressive hybrid funds. These hybrid funds invest 65% of your funds in equities and the remaining 35% in debt. While Equity provides growth to your fund, debt investment provides consistent returns during recessions or poor market conditions.
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