Market linked retirement products
Also written Market linked retirement accumulation products · Non-market-linked retirement products
Retirement accumulation products whose return depends on markets — NPS, ELSS and other mutual fund schemes — set against non-market-linked products such as PPF, where the principal is not at risk.
In plain language
A retirement corpus can be built two ways. Either the markets decide what it grows to, or something close to a guarantee does.
The workbook splits retirement accumulation products on exactly that line. Market linked products are NPS, ELSS and other mutual fund schemes. Non-market-linked products are PPF and the like.
The difference is not simply more risk against less risk. It is whose risk.
In a market linked product the risk depends on the option chosen and is tied to market returns. The workbook's own example makes the range clear: the risk on the G-Sec option under NPS is low, while ELSS, which invests in equity exclusively, is high. Same category, opposite ends.
In a non-market-linked product the risk is low as far as return of principal is concerned. Note the careful wording. The principal is safe; the return is not promised.
And on liquidity the two are closer than people expect. Both lock money up.
How it works
The comparison, as section 19.3.1 sets it out.
| Parameter | Market linked (NPS, ELSS, other mutual fund schemes) | Non-market-linked (PPF and the like) |
|---|---|---|
| Risk | Depends on the option chosen, but is linked to market returns. The G-Sec option under NPS is low risk; ELSS, which invests in equity exclusively, is high | Low as far as return of principal is concerned |
| Returns | Linked to the market and vary with the chosen option | Tend to be moderate to low, given the low principal risk. And increasingly there are no long term fixed return products — even EPF declares returns every year and PPF every quarter |
| Liquidity | By definition, tax advantaged retirement products tend to have lock in periods, to ensure the resources are actually available for retirement | Even poorer, in these principal guaranteed products, for the same reason |
The point the liquidity row is making. It is not that market linked products are more liquid. It is that both are illiquid, and for the same reason: the tax advantage is granted on condition that the money stays put until retirement. The workbook rates the non-market-linked products as even poorer on liquidity.
The return row contains the sharpest observation in the section. The idea of a guaranteed long-term return has quietly gone. EPF declares its rate annually and PPF quarterly. So a non-market-linked product protects the principal but does not fix the return for the term. A candidate who answers that PPF gives a guaranteed rate for 15 years has taken the label rather than the mechanism.
The figures the same chapter attaches to these products. Section 19.2.1 compares ELSS, NPS Tier 1 and fixed income tax saving instruments, and it is where the numbers live:
| ELSS | NPS Tier 1 | PPF and tax saving bank FD | |
|---|---|---|---|
| Equity exposure | Exclusively equity | Up to a maximum of 75% for selected subscribers; alternative investments up to a maximum of 5% for certain subscribers | Nil |
| Risk of loss of capital | High | Moderate, and can be made low by choosing a higher proportion of government securities | PPF low, sovereign risk; tax saving FD moderately low |
| Returns and tax | No guaranteed return; capital gains taxed at 12.50% | No guaranteed return; 60% of the corpus withdrawable tax free after age 60, the balance 40% must buy annuities, and the annuity received is fully taxable | PPF returns guaranteed but vary with the G-sec rate and can change every quarter; nil tax on returns; maximum contribution Rs 1,50,000 a year. Tax saving FD returns fixed for the tenure but taxable each year |
| Liquidity | 3 year lock in, then withdrawable any time | Lock in till age 60; partial withdrawals allowed subject to conditions; premature withdrawal requires using 80% of the amount to buy an annuity | PPF 15 year lock in from inception, partial withdrawal possible after 5 years; tax saving FD locked for the entire tenure |
Reading the two sections together is what makes the category usable. Section 19.3.1 gives the principle; 19.2.1 gives the numbers that show how wide the market linked category actually is.
A worked example
Ms Fernandes, 34, can save Rs 1,50,000 a year for retirement at 60 and asks which side of the line to sit on. Using the workbook's own product features:
| Route | Category | Equity exposure | Lock in | Tax on the way out |
|---|---|---|---|---|
| ELSS | Market linked | Exclusively equity | 3 years | Capital gains at 12.50% |
| NPS Tier 1, Active Choice | Market linked | Up to 75% equity, 5% alternatives | Till age 60 | 60% of corpus tax free, 40% must buy an annuity, annuity fully taxable |
| PPF | Non-market-linked | Nil | 15 years from inception | Nil tax on returns |
What the risk difference means in her case. She has 26 years. On the workbook's reading, the ELSS route carries high risk of loss of invested capital because the whole amount is in equity. The NPS route is moderate, and she can make it low by shifting to government securities. PPF carries low risk of loss of principal but pays a rate reset every quarter.
What the liquidity difference means. Her Rs 1,50,000 into ELSS is locked for 3 years and then free. The same amount into PPF is locked for 15 years, with a partial withdrawal possible only after 5. Into NPS Tier 1 it is locked till 60 — and if she breaks it early, 80% of the withdrawal must be used to buy an annuity.
So on liquidity the ranking is ELSS, then PPF, then NPS — and the workbook's own row says the non-market-linked products are even poorer than the market linked ones as a class.
And the exit tax, which decides more than the return. Suppose each route produces a corpus of Rs 90,00,000 at 60.
| Route | What she can take as cash | What is forced into an annuity |
|---|---|---|
| ELSS | The whole Rs 90,00,000, gains taxed at 12.50% | Nil |
| NPS Tier 1 | Rs 54,00,000, tax free | Rs 36,00,000, and the annuity from it is fully taxable at slab |
| PPF | The whole Rs 90,00,000, nil tax | Nil |
Rs 36,00,000 of the NPS corpus is not hers to deploy. That is the trade for the deduction she took on the way in, and it is a feature of the product rather than of the market linkage.
The PPF ceiling she has to work around. Its maximum contribution is Rs 1,50,000 a year, which happens to be exactly her saving. Any increase in her saving capacity has nowhere to go inside PPF.
Why NISM asks about it
Chapter 19 (Comparison of Products across categories), section 19.3.1 — Market linked versus Non-market-linked Retirement accumulation Products — is the first of the chapter's Other Comparatives and runs on three parameters: risk, returns and liquidity. Section 19.2.1, comparing ELSS, NPS Tier 1 and fixed income tax saving instruments, supplies the figures.
Expect a which-category question (NPS, ELSS and other mutual fund schemes are market linked; PPF is not), the risk-row nuance that risk depends on the option chosen and can be low for the NPS G-Sec option and high for ELSS, and the returns-row observation that EPF declares returns yearly and PPF quarterly. From 19.2.1 the reliable figures are the 75% and 5% NPS caps, the 3-year ELSS lock in, the 15-year PPF lock in and the 60:40 NPS exit split.
Common exam traps
- Market linked does not mean uniformly high risk. The workbook says risk depends on the option chosen: low for the NPS G-Sec option, high for ELSS.
- Non-market-linked protects the principal, not the return. The workbook is explicit that risk is low as far as return of principal is concerned, and adds that there are increasingly no long term fixed return products.
- EPF declares returns every year and PPF every quarter. Neither fixes a rate for the full term, and this is the sentence the section is built around.
- Non-market-linked products are rated even poorer on liquidity, not better. Both categories lock money up because both are tax advantaged retirement products.
- ELSS has a 3-year lock in, PPF 15 years from inception, NPS Tier 1 till age 60. Three different lock ins in one comparison, and they get swapped.
- Breaking NPS Tier 1 early forces 80% of the withdrawal into an annuity. That is the premature withdrawal rule in 19.2.1, distinct from the 40% annuitisation at a normal exit.
- PPF is capped at Rs 1,50,000 of contribution a year. ELSS and NPS have no such contribution ceiling in this comparison, though the deduction is capped separately.
- The 60% tax free and 40% annuity figures are the Chapter 19 exit description. Other chapters state the PFRDA exit percentages differently, so answer from the chapter the question is set in.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Equity Linked Saving SchemeAn equity mutual fund category that carries a section 80C deduction of up to Rs 1.5 lakh with a compulsory three-year lock-in — the shortest lock-in of any tax-saving instrument.
- Index futures and options horizonsThe workbook comparison of how long an index derivative can be held against how long an index fund can be held: a few days to a maximum of 3 months, against a lifetime.
- LadderingBuying bonds or fixed deposits maturing at staggered dates rather than all in the same year, so that interest rate risk is spread and a maturity arrives every year to fund income.
- Life-stage evaluationJudging a retirement benefit product against the objectives of the stage the investor is in — pre-retirement, retirement or post-retirement — because each stage needs a different thing from the product.
- Longevity riskThe risk that a person outlives their retirement assets — living longer than the plan assumed, so the corpus runs out while income is still needed.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- Public Provident FundA 15-year government-guaranteed savings account for individuals, at a rate reset quarterly, where the contribution, the interest and the maturity value are all outside tax under the old regime.
- Employee Provident FundA mandatory retirement savings scheme where employer and employee each contribute 12% of basic pay, credited to the employee's own account and paid out as a lump sum at retirement.