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

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, lets take a look at two alternative investment options of NPS and their upsides. 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.Advertisement 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 instrumentsAsset class C - Corporate debt and related instrumentsAsset class G - Government Bonds and related instrumentsAsset 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 ChoiceAge (years)Max. Equity AllocationUpto 5075%5172.50%5270%5367.50%5465%5562.50%5660%5757.50%5855%5952.50%60 & above50%Source: npscra.nsdl.co.in 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 subscribers 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 individuals 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: 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 GUp to 35 years7510153671111837671221386313243959142740551530415116334247173643431839443919424535204546322048472920514826205449232057502020605119186352181666531714695416127255 years & above151075Source: npscra.nsdl.co.in 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 GUp to 35 years5030203648292337462826384427293942263240402535413824384236234143342244443221474530205046281953472618564824175949221662502015655118146852161371531412745412117755 years & above101080Source: npscra.nsdl.co.in 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 GUp to 35 years2545303624433337234136382239393921374240203545411933484218315143172954441627574515256046142363471321664812196949111772501015755191378528118153798454678755 years & above5590Source: npscra.nsdl.co.in