Investment Options under NPS

NPS offers you with the flexibility to design your own portfolio based on your preference. In this post, I have talked about how much control and what kind of choices you have if you invest in NPS. If you think that you can't control the returns from your NPS account then you are wrong. You don't have control over how scheme performs but you have control how much you allocate towards different asset classes. Government employees don't have such a choice, their asset allocation is fixed.


The NPS offers you two approaches to invest in your account:

1. Active choice - Individual Funds (E, C and G Asset classes)
 
2. Auto choice - Lifecycle Fund

To understand these options, let us first take a look at the different asset classes in which the various funds under NPS can invest.

Asset Classes

There are three asset classes to choose from, which are defined below - 

Apart from the above Asset classes which are mandatory, there is one more asset class which is optional - Alternate Investment Fund (A) - This denotes investments in alternative investment schemes such as real estate investment trusts, infrastructure investment trusts or alternative investment funds. 

While asset classes remain the same for all subscribers, the allocations can change based on investment option (active or auto) chosen by the investor. 

Active Choice

This choice is for investors who want to control their asset allocation. You can choose to invest your entire pension wealth in "C" or "G" asset classes and upto a maximum of 50% in equity (Asset class "E"). You have the option to invest in Asset Class - "A", which is optional. However, if selected, the minimum allocation should be 1% and the maximum allocation can be 5%.

Unlike Asset Classes -"E" and "A", there is no maximum limit defined for Asset Classes - "C" and "G". If you want to invest all your pension corpus in government securities or other fixed income instruments, you can do it.

You can go from active to auto choice (and vice versa) but you can do that only once in a financial year. If you have moved to active choice, you can also change your asset allocation, again only once in a financial year. Few examples of allocation under Active Choice (E, C, G and A) are given below:

Auto Choice

NPS offers an easy option for those investors who do not have the required knowledge to manage their NPS investments. In case you are unable/unwilling to exercise any choice, your funds will be invested in accordance with the Auto Choice option. Like the active choice, subscriber here also must choose one Pension Fnd Manager, PFM under auto choice

This option adopts life cycle based approach, which means that when you are young exposure towards equity will be maximum. From age 36 onwards, the weightage in “E” and “C” asset class will decrease annually and the weightage in “G” class will increase annually.

After amendments, new life cycle funds have been introduced. Now a NPS subscriber can choose between three funds under Auto Option.

1. Aggressive Life Cycle Fund - Under this option, maximum equity allocation is kept at 75% up to the age of 35 years which gradually reduces to 15% by the time subscriber turns 55.
   
   If you are younger than 35 years and are looking for higher exposure to equity, you can select the aggressive fund in auto choice. Currently, this provides the maximum exposure to equity.
      
2. Moderate Life Cycle Fund - This option provides you with the option of a Life Cycle fund with a reasonable risk profile where the maximum equity allocation is kept at 50% up to the age of 35 years which gradually reduces to 10% by the time subscriber turns 55.
       
3. Conservative Life Cycle Fund - Under this option, maximum equity allocation is capped at 25% up to the age of 35 years which gradually reduces to 5% by the time subscriber turns 55.
   
   If you are about to retire and staring you investment in NPS, then you can choose this option. However, returns from this fund option will be low when compared to other life cycle funds.

The detailed age-wise asset allocation for all three Life Cycle Funds is given below. -