Active Vs Auto: Which Route Should You Opt For NPS Investment? Explained

An array of investment alternatives are available through the National Pension System (NPS), a government-sponsored retirement savings programme. NPS may be purchased in two different ways: active or auto choice. You have complete control over your asset allocation with active NPS. Contrarily, auto NPS automatically distributes your funds for you according to your age. Up to the age of 50, the maximum allowable equity investment under active choice is 75% of the overall asset allocation, whereas with auto choice, investments are made in a life-cycle fund. Here, a pre-defined portfolio which alters depending on the subscriber's age will decide how much money will be contributed among three asset classes. Here you can understand the difference between the active and auto-choice options under NPS from different financial advisors to make a better investment decision for your retirement.

Shruti Jain, CSO, Arihant Capital

When it comes to NPS (National Pension System) investment, choosing between the Active and Auto options depends on your investment approach and level of involvement.

The Auto choice is ideal for those who prefer a passive investment strategy and may not have the time or expertise to conduct in-depth investment research. This option follows a life-cycle-based approach, where the portfolio is initially weighted heavily towards equity at a younger age and gradually reduces the equity exposure as retirement approaches.

On the other hand, the Active choice offers greater control over asset allocation. This means you can personally decide how your funds are distributed across different asset classes, such as equity, corporate bonds, and government securities.

Ultimately, the decision between Active and Auto depends on your investment goals, risk tolerance, and level of comfort in managing your portfolio.

Shrinath ML, senior research analyst at FundsIndia

The choice between Active and Auto depends on whether you want to handle the asset allocation decision yourself or outsource it.

Active choice would be preferable if you are particular about asset allocation or want to keep your asset allocation stable.

But if you have no idea where to start, you can outsource the asset allocation decision by opting for the Auto choice. Considering the long-term nature of the product, you do not have to worry too much about three options under the Auto choice and go for either Moderate or Aggressive.

Nirav Karkera, Head of Research, Fisdom

The active investment approach empowers investors by offering the liberty to choose a combination of assets that aligns with their financial goals. This mix could include equities, corporate bonds, government securities, or alternative securities. In contrast, the auto approach automates this process, generating an asset mix majorly based on an investor's age.

The automatic strategy still affords some control to the investor. They can navigate their investment journey by opting for conservative, moderate, or aggressive pathways. Each option places a specific limit on equity exposure, with the aggressive option permitting the highest allocation and the conservative option, the least.

The auto approach presents a simplified path for those investors who may find it challenging to establish a robust asset allocation strategy. But, it's important to note that this strategy heavily leans on age as the key determinant, potentially neglecting a holistic view of an individual's personal finance situation and aspirations.

For investors equipped with a strong understanding of their risk tolerance, investment profile, and financial horizon, the active approach can be a more productive choice. By customizing their asset allocation, they have the capacity to more precisely align with their distinctive financial targets.

Maitry Shah, the founder of LakshMe, the CSR initiative of the Prudent Group

Active Route:

Pros:

1. Control and customization: Active management allows you to have control over your investment decisions, including choosing asset classes and fund managers based on your preferences.

2. Potential for higher returns: With active management, you have the opportunity to outperform the market and potentially achieve higher investment returns.

3. Tax benefits: NPS offers tax benefits on contributions and withdrawals, irrespective of the investment route chosen.

Cons:

1. Expertise required: Active management requires knowledge and expertise to make informed investment decisions, which may not be suitable for all investors.

2. Time and effort: Managing investments actively demands time, research, and continuous monitoring of market trends and fund performance.

3. Higher risk: Active management exposes you to market volatility and the risk of making poor investment decisions.

Auto Route:

Pros:

1. Simplicity and convenience: The Auto route offers a hands-off approach, where your investments are automatically allocated based on your age and risk profile, relieving you of the need to actively manage your portfolio.

2. Professional management: Your funds are managed by professional fund managers who make strategic investment decisions on your behalf.

3. Diversification: The Auto route typically provides a diversified portfolio across different asset classes, reducing the risk of concentration in a single investment.

Cons:

1. Limited control: With the Auto route, you have limited control over the asset allocation and fund manager selection, as these decisions are predetermined based on your age.

2. Lower potential for outperformance: The passive nature of the Auto route means you may not be able to take advantage of timely market opportunities or beat market returns.

3. Lack of customization: The Auto route may not cater to specific investment preferences or strategies that you may have.

In India, both the Active and Auto routes have their merits. The Active route is suitable for investors who are willing to devote time, have investment expertise, and seek greater control over their investments. On the other hand, the Auto route is suitable for those who prefer a simplified approach, want professional management, and are comfortable with a predetermined investment strategy. It's important to consider your financial goals, risk tolerance, and level of involvement before choosing the investment route for your NPS.

Satyen Kothari, the founder and CEO of Cube Wealth

Choosing between active and auto options in the National Pension System (NPS) depends on individual preferences and investment expertise. Active choice allows investors to decide the asset allocation, offering more control and the potential for higher returns. However, it requires active management and knowledge of investment strategies. On the other hand, auto choice allocates funds based on the investor's age, reducing the need for active management but potentially limiting returns. Investors should assess their risk appetite, investment knowledge, and willingness to actively manage their portfolio before making a decision.

Pratapsingh Nathani, chairman and MD at Beacon Trusteeship

The National Pension System (NPS) is a government-sponsored retirement savings plan that offers a variety of investment options. NPS investors can choose to invest in a mix of equity, debt, and other asset classes.
There are two main ways to invest in NPS: active and auto. Active NPS gives you the freedom to choose your own asset allocation. Auto NPS, on the other hand, automatically allocates your money for you based on your age.
So, which route should you take? It depends on your individual circumstances and preferences.

Active NPS

If you are comfortable with risk and want to have more control over your investments, then active NPS may be a good option for you. With active NPS, you can choose to invest in a mix of equity, debt, and other asset classes. This gives you the potential for higher returns, but it also comes with more risk.

If you choose to invest in active NPS, you will need to do your own research and choose the asset classes that you think will perform the best. You will also need to monitor your investments regularly and make changes as needed.

Auto NPS

If you are not comfortable with risk or don't have the time to manage your own investments, then auto NPS may be a good option for you. With auto NPS, the pension fund manager will automatically allocate your money for you based on your age. This means that you don't have to worry about choosing asset classes or monitoring your investments.

Auto NPS is a good option for beginner investors or investors who want to take a hands-off approach to their investments. However, it is important to note that auto NPS offers lower potential returns than active NPS.

Which Route Is Right for You?

The best way to decide which route is right for you is to consider your individual circumstances and preferences. If you are comfortable with risk and want to have more control over your investments, then active NPS may be a good option for you. If you are not comfortable with risk or don't have the time to manage your own investments, then auto NPS may be a good option for you.

It is important to note that both active and auto NPS investment options are subject to market risks. You should carefully consider your investment goals, risk appetite, and time horizon before making any investment decisions.