Planning for retirement is one of the key long term financial goals for most investors. And the National Pension System (NPS) is seen as one of the key tools to achieve this for government and private sector employees alike.
Investors can exercise one of the two investment options: active choice and auto choice. In the former, investors can themselves determine the allocation to four different asset classes namely: government securities, corporate debt, equity and alternative assets.
On the other hand, the auto choice enables investors to invest their assets in a predetermined ratio based on their age. Regardless, allocation to equity cannot be more than 75 percent of the total portfolio.
Investors must be aware that the auto choice is usually recommended for those who prefer passive investing over active. And those investors who prefer active investing usually opt for active choice of their NPS funds.
Active choice: In the active choice, maximum active allocation should not be more than 75 percent of the portfolio up to the age of 50. And the next year onwards, it reduces by 2.5 percent each year, thereby reducing equity allocation to 50 percent at 60 years of age.
And the contribution to alternative investment funds should not be more than 5 percent. Also, total allocation across all four asset classes should be equal to 100 percent.
Auto choice: In the auto choice, allocation to equity stays high when the subscriber is young, and it gradually falls according to a set formula as the age advances.
Within the auto choice, investors can set the maximum threshold of equity between 25 -75 percent based on their risk appetite.
Conservative life cycle fund: It has a cap of 25 percent of the total assets for equity investment. The exposure to equity starts with 25 percent till 35 years of age and gradually reduces according to the subscriber’s age.
After the age of 35, the allocation to equity starts to drop one percent each year and eventually it hits 5 percent at the age of 55.
Moderate life cycle fund: It provides a cap of 50 percent of the total assets for equity investment. The exposure in equity investments starts with 50 percent till 35 years of age and gradually reduces as per the age of the subscriber.
After the age of 35, allocation to equity starts to drop 2 percent each year till it hits 10 percent at the age of 55.
Aggressive life cycle fund: This has set a threshold of 75 percent of the total assets for equity The exposure to equity starts with 75 percent till 35 years of age and gradually declines in accordance with the age of the subscriber.
And after 35, equity allocation starts to drop four percent each year till it reaches 15 percent at the age of 55.