As a solid retirement-focused product, NPS doesn’t get the attention it deserves. And this is the reason for its low popularity and AUM (assets under management) in the non-government schemes.
Most people invest in NPS voluntarily only for the additional Rs 50,000 tax benefit. But what if you want to make it an integral part of your retirement savings?
How then should you set your NPS tier 1 allocation to fit your overall retirement portfolio?
Sometime back, I had already written about the Active Vs Auto options in NPS, where you can choose from Auto choices of Aggressive Life Cycle Fund (LC75), Moderate Life Cycle Fund (LC50), Conservative Life Cycle Fund (LC25), or go for the Active Choice where you self-manage the asset allocation for your NPS savings.
NPS allocation for your retirement savings
Here are some thoughts on how to go about it.
-It is well-established that if you are young or have 2-3 decades left for retirement, then you can and should be aggressive with your retirement savings. This means your investments should have a large allocation towards equities via Scheme E. Assuming EPF is being sufficiently contributed via EPF+VPF+PPF, if you want to go via the NPS route, then it’s best to have a high component of equity in your NPS.
-If your EPF corpus isn’t very large as your employer doesn’t have a generous PF policy and you have already utilized PPF Rs 1.5 lakh annual limit, you can use your NPS account as a debt product and have a high allocation to debt schemes G and C. For equity exposure, you can invest via pure equity funds.
-On the other hand, if your past employment(s) have led to a substantial accumulation in your PF corpus and your equity exposure is low, then you can use NPS as a vehicle to increase equity exposure by making maximum allocation to scheme E.
Let’s take another approach to understand this.
Suppose your current retirement portfolio has Rs 50 lakh divided between Rs 45 lakh in Provident fund and Rs 5 lakh in equity funds. You still have 15 years left to retire. So if you have to add Rs 10 lakh to the NPS, how should you decide your allocation?
If you are a conservative saver who doesn’t want too many ups and down, then it’s best to have a conservatively structured portfolio. So, your equity allocation can be about 10-15 percent. Let’s say it’s 10 percent for simplicity. With Rs 45 lakh in PF, Rs 5 lakh in equity funds, you can invest the additional Rs 10 lakh as Rs 1 lakh in NPS (E scheme) and the remaining Rs 9 lakh in NPS (G+C schemes). That way, your total equity exposure would be Rs 6 lakh (Rs 5 lakh in equity funds and Rs 1 lakh in NPS-E), which is 10 percent of the overall retirement portfolio of Rs 60 lakh.
Aggressive investors can step up on equities
And what if you aren’t a conservative investor and can digest some market volatility?
Assuming you are a Balanced/Moderately Aggressive investor, you can have about 50 percent in equities.
So how do you rejig your Rs 60 lakh portfolio?
Your Rs 45 lakh is unfortunately illiquid. So you can’t change that and hence, you can only do what’s possible with regards to redoing your portfolio. The remaining Rs 5 lakh is in equity funds. For the rest of Rs 10 lakh to be added to NPS, you cannot go above 75 percent for equities (Asset class scheme E). That is the maximum equity allocation allowed under the Active choice (which keeps on reducing as the subscriber gets older). So only 75 percent of Rs 10 lakh can be put in Scheme E. So that is what you do. So in total, you now have Rs 5 lakh + Rs 7.5 lakh in equities. And the remaining Rs 45 lakh + Rs 2.5 lakh is in debt. The allocation is Equity:Debt of 21:79, when we were targeting 50:50. But that is because the PF corpus is illiquid and can’t be reallocated.
The main idea is to ensure that NPS helps you achieve the targeted retirement corpus via suitable asset allocation.