The National Pension System (NPS) in India offers subscribers a choice in asset allocation, allowing them to decide how their contributions are invested. The NPS provides two main investment options:
- Active Choice: Under the Active Choice option, subscribers can decide the allocation of their funds across four asset classes:
- Equity (E)
- Corporate Bonds (C)
- Government Securities (G)
- Alternative Investment Funds (A)
- Auto Choice: Alternatively, subscribers can opt for the Auto Choice option, where the allocation of funds is managed automatically based on the subscriber’s age. The Auto Choice option gradually shifts the allocation from higher-risk assets like equities to lower-risk assets like government securities as the subscriber approaches retirement age.
Here’s a breakdown of the asset allocation guidelines for both Active Choice and Auto Choice options:
Active Choice:
- Equity (E):
- Under Active Choice, subscribers can allocate a portion of their funds (up to a maximum of 75%) to equity-related instruments. Equity investments are considered high-risk, high-return investments and are suitable for long-term growth.
- Corporate Bonds (C):
- Subscribers can allocate funds (up to a maximum of 100%) to corporate bonds, which are debt securities issued by corporations. Corporate bonds typically offer higher returns than government securities but carry slightly higher risk.
- Government Securities (G):
- Subscribers can allocate funds (up to a maximum of 100%) to government securities, which are considered safe investments as they are backed by the government. Government securities offer lower returns compared to equities but are relatively low risk.
- Alternative Investment Funds (A):
- Subscribers can allocate funds (up to a maximum of 5%) to Alternative Investment Funds, which may include investments in assets such as real estate investment trusts (REITs), infrastructure investment trusts (InvITs), etc. These investments offer diversification but may carry higher risk.
Auto Choice:
The asset allocation under Auto Choice is based on the age of the subscriber and is divided into three Life Cycle Funds (LCFs):
- LC 75: This fund invests up to 75% in equity and equity-related instruments, with the remaining portion invested in debt instruments.
- LC 50: This fund invests up to 50% in equity and equity-related instruments, with the remaining portion invested in debt instruments.
- LC 25: This fund invests up to 25% in equity and equity-related instruments, with the remaining portion invested in debt instruments.
As the subscriber’s age increases, the allocation to equity decreases gradually, while the allocation to debt increases, thereby reducing the overall risk exposure of the portfolio.
It’s important for NPS subscribers to carefully consider their risk tolerance, investment goals, and time horizon before choosing between Active Choice and Auto Choice options and determining their asset allocation. Additionally, subscribers should review and adjust their asset allocation periodically to align with their changing financial circumstances and retirement goals.