Why a Lucknow govt teacher delayed contribution to NPS

Focused on managing a home loan and investing in over ten mutual fund schemes, Singh delayed signing up, opting instead for a higher in-hand salary. His decision, influenced by hopes of the old pension scheme (OPS) returning in some form, highlights the financial dilemmas faced by young government employees navigating between immediate needs and long-term security.

It is only when his financial advisor Ajay Pruthi explained to him about the drawbacks of not subscribing to it, he went ahead with it. 

“I did know that the government too invests in NPS on my behalf if I am making my share of contributions. I could not take advantage of it for nearly 3 years,” said Singh. 

A government employee is supposed to contribute 14% of his basic pay and dearness allowance (DA) to NPS. The government matches the same contribution. 

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Singh’s NPS account is expected to accumulate ₹3 crore after 30 years when he retires at a modest compound annual growth rate (CAGR) of 7%.  

Portfolio chaos

Despite his enthusiasm for financial planning, Singh’s journey was anything but structured. Motivated by numerous YouTube videos on wealth management, he dived into mutual fund investments and bought health and life insurance. 

However, his portfolio lacked direction—his mutual funds were disorganised, his health insurance coverage fell short, and endowment plans further muddled his strategy.

Through YouTube, he learned about fixed-fee SEBI-registered investment advisors (RIAs). Seeking clarity amid the confusion of navigating the investment landscape, he approached RIA Pruthi for financial guidance in April 2023.

“Vivek was paying EMIs of his home loan. Whatever little he could save after household expenses, he was investing in mutual funds. However, his fund selection was arbitrary and there were over 10 schemes in his portfolio,” said Pruthi.

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Regarding health insurance, Singh was eligible for the Pandit Deendayal Upadhyay State Employee Cashless Medical Scheme, a cashless health insurance program for Uttar Pradesh government employees. However, his department had not yet rolled it out for all employees. As a result, Singh opted for an individual health insurance policy of ₹10 lakh from Niva Bupa to ensure coverage.

“Pruthi suggested that I buy a super top-up policy of ₹40 lakh with ₹10 lakh deductible to increase the total cover to ₹50 lakh in a year. He emphasised that I purchased this policy at the time of renewal of my ₹10 lakh policy by the same insurer. I also included my spouse in the base and super top-up policy,” said Singh. 

A super top-up policy with a deductible kicks in only after the base policy coverage (which matches the deductible amount in the super top-up) is exhausted. For instance, purchasing a base policy of ₹50 lakh can be significantly more expensive than opting for a base policy of ₹10 lakh along with a super top-up policy of ₹40 lakh, which comes with a ₹10 lakh deductible.

Pruthi advised him to purchase a personal accident policy of ₹50 lakh, which would offer him disability benefits, and include ₹20 lakh cover for temporary total disability in this policy. 

“This offers a weekly benefit of ₹20,000 per week for 100 weeks in case of temporary total disability due to an accident. Purchasing the policy at higher ages can be difficult,” said Pruthi. Singh is yet to do it. 

On the mutual fund front, Singh had purchased a couple of sectoral funds and two or three funds from the same category. On Pruthi’s advice, he cleaned up the MF portfolio by redeploying funds only in three schemes – UTI Nifty50 Index Fund Direct Plan, Parag Parikh Flexi Cap Fund Direct Plan, and Motilal Oswal Nifty150 Midcap Fund Direct Plan growth.

“His monthly SIP amount was not much but was going into 10 schemes, that too of regular plans. I suggested that he invest only in 3 direct plans. This would help him accumulate 15% higher than what he would have accumulated otherwise,” said Pruthi. 

As per Singh’s financial goals, he needed a term life insurance cover of ₹2.5 crore, but he only had ₹1 crore coverage. 

“I applied for a fresh insurance cover of ₹2.5 crore, but the insurer rejected my proposal because I had undergone gallstone surgery in 2023. I will be applying again after the 6-month cool-off is over. For now I have continued ₹1 crore term plan,” said Singh. 

Another value-add was about the suggestion to close his home loan with his investment corpus so that he does not have to pay EMIs and can invest more in mutual funds.  

Social vs financial capital 

Singh faced a moral dilemma. He was paying a hefty premium for two endowment insurance plans bought from a relative. Pruthi advised him to close the two policies and deploy the premium amount in mutual funds.

“The policies have an internal rate of return of just about 5-6%. The premium amount, if deployed in MFs, would help him accumulate double of what the maturity proceeds of these policies are,” Pruthi said. 

Singh, however, did not close it. “I bought the two policies from a close relative. It would be highly uncomfortable for me to tell him to close it,” he said. 

Pruthi has earmarked the maturity amount of the two policies for his child’s higher education goal. The couple is planning to have one in a year or two.

Choosing the right financial advisor 

Singh was looking for a fixed-fee financial advisor, but many of them would charge ₹40-50,000 a year. 

“I do not earn a cushy salary like an IT professional working in metros. I could not have paid the advisory fee of more than my monthly SIP outgo. Eventually, I got to know about Pruthi who only charged ₹11,000 annual fee. I had my doubts due to a low fee compared to others, but it all worked out. I paid a ₹5,000 renewal fee. The fee will increase by ₹1,000 after every two years,” he said. 

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Pruthi now charges ₹13,000 first-year annual fee with a renewal fee of ₹6,000 that increases by ₹1,000 after every 2 years.

“The fee is now inclusive of GST (goods and services tax). Earlier I paid GST myself. With the low fee, we want to offer quality financial advisory to people who don’t have much extra money. It is possible with technology,” he said.