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National Pension System: Here’s All You Need To Know About Two Types of Investment Options

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The Pension Fund Regulatory and Development Authority (PFRDA) was established by an Act of Parliament to manage and regulate the National Pension System (NPS) which is a voluntary scheme where subscribers are required to make regular contributions towards their NPS account during their employment period to benefit from accumulated pension wealth under the scheme to purchase a life annuity upon maturity. NPS provides two types of investment alternatives as well as a selection of Pension Funds (PFs) for prudent wealth management. An active subscriber not only has the option to opt for any investment choice but also he or she can switch from one investment choice to another, as well as from one fund manager to another, according to PFRDA. Now, let's take a look at two alternative investment options of NPS and their upsides.

 

What are the investment options under NPS?

What are the investment options under NPS?

When subscribing to the CRA system under NPS, an NPS member must select a Pension Fund Manager (PFM) and also a scheme choice. To open an NPS account one needs to be a citizen of India, whether a resident or a non-resident, must be between the ages of 18 and 60 at the time of registration to the POP/ POP-SP. While filing the registration form, applicants must follow the Know Your Customer (KYC) guidelines before submitting the duly filled application form along with the required documents.

The active member or subscriber has a number of alternatives to opt for. Multiple PFMs, investment choices (Auto or Active), and four asset classes (Equity, Corporate Debt, Government Bonds, and Alternative Investment Funds) are available in NPS. The account holder initially picks the PFM, after which he or she can choose from any of the investment alternatives. The subscriber must choose between Active Choice and Auto Choice for his or her investment strategy.

NPS Active Choice: Individual Funds
 

NPS Active Choice: Individual Funds

Under this sort of investment option, the subscriber has the flexibility to actively choose how his or her money is allocated based on personal preferences. The PFM, Asset Class, and percentage allocation to be undertaken in each scheme of the PFM must be provided by the subscriber. Under a single PFM, the allocation is to be selected from the following four asset classes (equity, corporate debt, government bonds, and alternative investment funds), according to PFRDA.

  • Asset class E - Equity and related instruments
  • Asset class C - Corporate debt and related instruments
  • Asset class G - Government Bonds and related instruments
  • Asset Class A - Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, Invlts, etc.

As seen below, a subscriber can pick various Asset Classes under a single PFM:

  • Up to the age of 50, you can deposit up to 75 percent of your overall asset allocation towards equity.
  • From the age of 51 onwards, the maximum allowed equity investment will be determined by the equity allocation chart presented below. Alternative Investment Funds cannot contribute more than 5% of their investments. The overall allocation throughout asset classes E, C, G, and A must be 100 percent.

Equity Allocation Matrix for Active Choice

Age (years)Max. Equity Allocation
Upto 50 75%
51 72.50%
52 70%
53 67.50%
54 65%
55 62.50%
56 60%
57 57.50%
58 55%
59 52.50%
60 & above 50%
Source: npscra.nsdl.co.in

NPS Auto Choice: Lifecycle Fund

NPS Auto Choice: Lifecycle Fund

Investors who have lack of necessary skills to administer their NPS contributions can opt for this choice provided by NPS. The contributions under this option will be placed in a life-cycle fund. A pre-defined portfolio (which fluctuates with the subscriber's age) will choose the percentage of funds invested across three asset classes. According to the official website of NSDL "A subscriber who wants to automatically reduce exposure to more risky investment options as he/she gets older, Auto Choice is the best option. As age increases, the individual's exposure to Equity and Corporate Debt tends to decrease. Depending upon the risk appetite of Subscriber, there are three different options available within ‘Auto Choice' - Aggressive, Moderate, and Conservative." The following are the specifics of these funds:

LC75 - Aggressive Life Cycle Fund

LC75 - Aggressive Life Cycle Fund

Equity investments are limited to 75 percent of the total assets in this Life cycle fund. The equity investment allocation begins at 75% until the subscriber reaches 35 years of age, then steadily decreases as the subscriber matures.

Age (years)Asset Class EAsset Class CAsset Class G
Up to 35 years 75 10 15
36 71 11 18
37 67 12 21
38 63 13 24
39 59 14 27
40 55 15 30
41 51 16 33
42 47 17 36
43 43 18 39
44 39 19 42
45 35 20 45
46 32 20 48
47 29 20 51
48 26 20 54
49 23 20 57
50 20 20 60
51 19 18 63
52 18 16 66
53 17 14 69
54 16 12 72
55 years & above 15 10 75
Source: npscra.nsdl.co.in

LC50 - Moderate Life Cycle Fund

LC50 - Moderate Life Cycle Fund

Equity investments are limited to 50% of the total assets in this life cycle fund. The equity investment allocation begins at 50% until the subscriber reaches 35 years of age, then steadily decreases as the subscriber matures.

Age (years)Asset Class EAsset Class CAsset Class G
Up to 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 years & above 10 10 80
Source: npscra.nsdl.co.in

LC25 - Conservative Life Cycle Fund

LC25 - Conservative Life Cycle Fund

Equity investments are limited to 25% of the overall assets in this Life cycle fund. The equity investment allocation begins at 25% until the subscriber reaches 35 years of age, then steadily decreases as the subscriber matures.

Age (years)Asset Class EAsset Class CAsset Class G
Up to 35 years 25 45 30
36 24 43 33
37 23 41 36
38 22 39 39
39 21 37 42
40 20 35 45
41 19 33 48
42 18 31 51
43 17 29 54
44 16 27 57
45 15 25 60
46 14 23 63
47 13 21 66
48 12 19 69
49 11 17 72
50 10 15 75
51 9 13 78
52 8 11 81
53 7 9 84
54 6 7 87
55 years & above 5 5 90
Source: npscra.nsdl.co.in

Story first published: Monday, August 2, 2021, 13:59 [IST]
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