The National Pension System is an ultimate option for retirement planning, thanks to its wide range of investment options that suit various financial goals and risk tolerances. Moreover, it lets subscribers choose between auto and active investment choices according to the level of control they desire over their fund allocation.
This post will explore the complexities of the National Pension System (NPS) investment to facilitate investors' decision-making.
NPS Investment Options
Firstly, understanding the various fund options available for NPS subscribers is essential. The National Pension System subscribers or fund managers can channel their funds into 4 asset classes. The pension fund managers can manage the NPS funds to exercise the choices across each asset class. These include the following:
Equity :
Predominant investments in equity market instruments
Government Securities:
Investments in securities issued by state governments, money market instruments, and the central government
Corporate Debt:
Investments in bonds issued by PFIs (Public Financial Institutions), PSUs (Public Sector Undertakings, money market instruments, and infrastructure companies
Alternative Investment Funds:
Investments in alternative instruments like AIFs, REITS, CMBS, etc.
Understanding the Active Choice in NPS
Active Choice is most suitable for subscribers who want to decide their asset allocation. Under this choice, subscribers can choose the ratio of their contributions towards various asset classes. Although they have an active say in the asset mix, they must still follow certain limitations. For instance, they can allocate up to 75% of their assets to equities. However, they can allocate 100% of the funds in government and corporate bonds.
Understanding the Auto Choice in NPS
The Auto Choice option is suitable for beginners who seek automatic allocation of their funds in various asset classes. Experienced fund managers decide the proportion of funds going towards various asset classes. It adopts an approach based on the subscriber's age, life cycle, and risk appetite. For instance, they can afford an equity-heavy portfolio at a young age. However, as they approach retirement, their equity exposure decreases systematically.
The approach optimises returns and protects the subscriber’s funds from market volatility. There are three LC (Life-cycle) funds to choose from under the Auto Choice:
Aggressive LC Fund:
This aggressive approach allows maximum equity allocation up to 75%.
Moderate LC Fund:
The default option caps equity exposure to 50%.
Conservative LC Fund:
This option caps the maximum equity allocation at 25%.
Equity Exposure Limits in Different Investment Choices
When calculating NPS contribution, an investor must evaluate the maximum limit to equity exposure in both Active and Auto investment choices. Underactive Choice, a maximum equity exposure of 75% is permissible. However, investors can allocate 100% of the NPS funds to government or corporate bonds.
The Aggressive LC Fund allows the highest equity exposure in the Auto Choice investment option. However, as the subscriber approaches retirement, their equity exposure decreases to 15%. This approach primarily aims to mitigate the influence of market volatility due to equity investments. With timely adjustments of asset allocations, the Auto Choice option provides a more stable and balanced investment strategy for individuals nearing retirement.
Freedom to Switch Between NPS Investment Options
National Pension System subscribers can choose the option they want to exercise and the fund manager with which to invest. NPS allows them to change their fund manager once and investment scheme 4 times annually. The shift from NPS Tier I and Tier II accounts is also permissible. Such flexibility provides subscribers ample alternatives for investment based on their age, life stage, and desired asset allocation.
Which Is Better, NPS Auto or Active?
Subscribers who need help deciding their investment options must initiate their NPS contribution with Auto Choice, which is available by default. It brings powerful results from NPS investments when the subscriber cannot decide. However, once they begin tracking their way to asset allocation and performance, they may feel confident in managing their investments. That is the right time to shift to an Active Choice NPS account.
The National Pension System is an excellent retirement planning and investment management tool. Its two-tier system offers the best of both worlds: investors can save for the future while having the flexibility to manage finances and achieve goals. Understanding the NPS investment choices helps make smart choices and prepare for retirement.