Learn All About Investment Choices & Asset Allocation in National Pension System

National Pension System is a superb low-cost investment avenue for young earners to help them start planning early for their retirement systematically and efficiently. NPS offers a lot of choices to investors. One such choice is the choice regarding asset allocation. This article explores the asset allocation approaches and the types of investments you can choose to invest in NPS. This information can help you make an informed decision and help you align your investments with your risk appetite and investing style.

Investment choices available in NPS

The money that you invest in NPS is applied to your investments as per your choice. NPS offers you two investment choices as follows:

  • Active choice – Individual Funds (Asset Class G, Asset Class C, and Asset Class E)
  • Auto choice – Lifecycle Fund

Suppose you do not exercise a particular choice. In that case, NPS will invest your funds as per the “Auto Choice” option. In this option, your money is invested in a bouquet of schemes depending upon your age.
Let us understand both the investment choices in finer detail.

Option #1: Auto choice – Lifecycle Fund

An auto choice is an excellent option for those investors who do not have the required knowledge or time to manage their NPS portfolio. Also, suppose you have not selected any asset allocation choice in your application. In that case, your money will be invested in line with the Auto option.

In the Auto option, the investment is made in a lifecycle fund. There is a pre-defined investment ratio across asset classes in this fund as per the investor’s age. For example, at the lowest entry age of 18 years, your money will be invested in the following ratio:

  • 50% in “E” Class
  • 30% in “C” Class
  • 20% in “G” Class

Below points will explain how this lifecycle approach works for the investor:

  • These ratios will remain fixed for all contributions until the participant reaches the age of 36.
  • From the investor’s age of 36 onwards, the weight in the “E” and “C” asset class will decrease annually. The weight in the “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class.
  • You can choose only one PFM under the auto choice. In case you do not indicate any choice of PFMs, it is deemed that you have consented to opt for the default option, which is SBI Pension Funds Private Limited.
  • Reallocation among the asset classes shall happen on the subscriber’s date of birth.
  • The fund managers are required to update the Net Asset Value (NAV) of the funds regularly so that investors can make informed decisions regarding their finances.

Table of Lifecycle Fund

Below is a table of lifecycle fund. It shows how the allocation changes with the increase in age of the investor:

Age Asset Class E (%) Asset Class C (%) Asset Class G (%)
Upto 35 years 50 30 20
36 48 29 23
37 46 28 26
38 44 27 29
39 42 26 32
40 40 25 35
41 38 24 38
42 36 23 41
43 34 22 44
44 32 21 47
45 30 20 50
46 28 19 53
47 26 18 56
48 24 17 59
49 22 16 62
50 20 15 65
51 18 14 68
52 16 13 71
53 14 12 74
54 12 11 77
55 10 10 80

Option #2: Active choice – Individual Funds

In this option, you can “actively” decide the ratio of your NPS pension wealth in the following three options:

  • Asset Class G: Investments in Government securities
  • Asset Class C: Investments in fixed income instruments other than Government securities
  • Asset Class E: Investments in predominantly equity market instruments

You can note the following important points:

  • Suppose you decide to actively exercise your choice about investment options. In that case, you need to indicate your choice of Pension Fund Manager (PFM) from among the eight PFMs appointed by PFRDA. There can be only one PFM. If you do not indicate any choice, you deem to have consented to choose the default PFM as provided by the PFRDA. The default PFM is SBI Pension Funds Private Limited.
  • You can choose to invest your entire pension wealth in C or G asset classes and up to a maximum of 50% in equity (Asset class E).
  • You can distribute your pension wealth across E, C and G asset classes, subject to such conditions as may be prescribed by PFRDA.

Selecting “Active Choice” requires a more active approach on your part as an investor. You can keep the following points in mind while following this approach:

  • While E Asset class can give you more return, it also carries the risk of volatility and loss of capital. The best way to manage the risk is to “diversify”. In other words, don’t put all your eggs in one basket.
  • Consider your investment time horizon to decide on the extent of risk that you can take. The higher the time horizon, the higher is the risk you can take and vice versa.
  • Your risk appetite can change. Try to periodically review your investment choices and check the asset allocation. Ensure that the mix you have chosen is still appropriate for your age and financial goals. If not, rebalance your portfolio and bring it to your ideal allocation.

Change of scheme preference by the subscriber

A subscriber can change the following parameters once a year:

  • Existing PFM,
  • Investment option (Active or Auto choice)
  • Asset allocation between various asset classes E, C, G.

Other points concerning change in scheme preference are as follows:

  • The change in scheme preference shall work retrospectively, i.e. it shall apply to the existing pension corpus and the prospective subscriptions.
  • The subscriber who wants to exercise choice shall need to apply in form No. UOS – S3 to the POP-SP or WhatsApp Finbingo (+91 93219 08752) along with a copy of PRAN.

Conclusion

NPS scores very high on the parameters of transparency and flexibility. As we can see above, NPS offers a range of investment choices and fund management options to suit every investor. However, investors have to spend some time assessing their risk appetite and knowledge of financial markets to make the right investment choice.
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