National Pension System (NPS) subscribers now have another investment option to choose from, in addition to the existing active and auto asset allocation choices.
The Pension Fund Regulatory and Development Authority (PFRDA) has recently introduced ‘Balanced Life Cycle Fund’ under NPS, which provides automatic rebalancing of asset classes (equity, corporate debt and government securities) as per the age and risk profile of the investor.
The maximum allocation to equities under this fund is 50 percent, which is available to those up to the age of 45 years. Corporate debt allocation (scheme C) will be 30 percent and G-sec (scheme G) exposure 20 percent. Post this age, equity allocation starts tapering gradually and is capped at 35 percent for those over 55 years of age. The safest instrument – scheme G (government securities) – will have the highest allocation then at 55 percent, while corporate debt makes up for 10 percent. The purpose is to ensure that as retirement nears, the corpus remains protected against market volatility.
| Asset allocation under NPS' Balanced Life Cycle Fund | |||
| Age | Equity (Asset Class E) | Corporate debt (Asset Class C) | G-sec (Asset Class G) |
| Up to 45 years | 50% | 30% | 20% |
| 46 years | 48% | 28% | 24% |
| 47 years | 46% | 26% | 28% |
| 48 years | 44% | 24% | 32% |
| 49 years | 42% | 22% | 36% |
| 50 years | 40% | 20% | 40% |
| 51 years | 39% | 18% | 43% |
| 52 years | 38% | 16% | 46% |
| 53 years | 37% | 14% | 49% |
| 54 years | 36% | 12% | 52% |
| 55 years and beyond | 35% | 10% | 55% |
The need for a new fund choice
The NPS already offers auto allocation choice, along with three investment strategies – aggressive, moderate and conservative lifecycle funds. Under the aggressive life cycle fund, the maximum equity allocation can go up to 75 percent, but only those under the age of 35 years can choose this level of equity exposure.
For those up to the age of 45 years, the equity ceiling is lower at 35 percent, compared to the balanced lifecycle fund. “So balanced lifecycle fund lies between aggressive and moderate lifecycle funds. Many NPS subscribers, particularly younger investors, felt the maximum equity allocation permitted in all the auto fund options was on the lower side. So this addresses their concerns,” says Sumit Shukla, CEO, Axis Pension Fund.
Higher equity allocation can yield higher returns and aid in long-term wealth creation, provided you are willing to take on risks and stomach market volatility in the interim. For conservative investors, a higher debt and G-sec allocation will suit better.
“The PFRDA and the pension funds would have intelligence on how money is flowing into various asset classes and subscribers’ investment preferences. People want more equity exposure now to create a bigger retirement corpus,” says Kuldip Kumar, Founder, Mainstay Tax Advisors.
Also read: How to choose the right annuity plan in NPS
Should you pick this option?
Financial advisors believe the active allocation option offers scope for higher returns and thus larger retirement fund. The control is entirely in your hands. “Under balanced lifecycle fund, equity exposure will go down in line with the subscriber’s age. For someone who is 45, the equity allocation is capped at 50 percent. However, with active allocation, it can be 75 percent. A difference of 25 percentage points over a period of ten years – since a 45-year-old has ten years to go before she retires – can make a huge difference in the retirement corpus. I firmly believe active choice is better than auto choice funds,” says Harshad Chetanwala, financial planner and Co-founder, Mywealthgrowth.com.
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