At a time when the Pension Fund Regulatory and Development Authority of India has allowed subscribers of National Pension System (NPS) to change the asset allocation under the scheme four times a year, investors should set their Tier 1 allocation to fit their overall retirement portfolio and be patient with their investment to maximise returns. Except government employees, all subscribers can now modify their investment pattern —allocation of funds in various available asset classes — online by using the login id and password.
Experts say subscribers will have to set a suitable asset allocation keeping in mind the targeted retirement corpus they want to build over a long period of investing. As NPS offers tax-free rebalancing, investors must look at changing the asset allocation in case the targeted corpus looks to fall short during the investing period.
There are two investment options for NPS subscribers — active choice and auto choice. In active choice, the subscriber will have to decide his asset allocation based on his risk appetite. The investments are done in four types of asset classes — equity, government bonds, corporate debt and alternative investment funds. In the auto choice lifecycle fund there are three variants: aggressive life cycle fund, moderate life cycle fund and conservative life cycle fund.
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Right asset allocation
If subscribers have investments in Employees’ Provident Fund (EPF) and Public Provident Fund (PPF), which are debt-oriented retirement accumulation funds, then they should go for higher exposure in equity for NPS. Such subscribers should look at active choice where the maximum equity allocation will be 75% up to the age of 50 and will gradually taper off to 50% till the time the subscriber reaches 60 years of age. However, as per norms allocation cannot to alternative investment funds cannot exceed 5% at any stage.
Young investors who are not adept to self-manage the asset allocation should opt for aggressive life cycle fund, where the maximum equity allocation will be 75% of the total assets till 35 years of age and will gradually reduce to 40% when the subscriber turns 40 and further down to 35% when he turns 45 years, 20% at the age 50 and 15% when he turns 55 years. The allocation to corporate debt is capped at 10% at the age of 35 years and gradually increases to 20% at the age of 50 years and then gradually reduces to 10% when the investor turns 55 years. On the other hand, the allocation to government securities increases from 15% at the age of 35 and rises to 75% when the investor turns 55.
Conservative investors can select either moderate life cycle fund or conservative life cycle fund. In the former, equity allocation is capped at 50% up to age of 35 and falls to 40% at 40, 30% at 45 years, 20% at 50 years and 10% when the subscriber turns 55 years. In the latter, the equity allocation is capped at 25% up to the age of 35 years, falls to 20% at the age of 40 and gradually comes down to 5% when the subscriber turns 55.
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Young? Go for higher equity allocation
Experts say for very long duration investments such as building a retirement corpus, the allocation to equity should be high to fetch higher returns in the long-run. Data on returns from NPS trust show that the 7-year equity returns range between 12.83% and 14.33% across nine pension funds.
The seven-year return in the equity category is highest for HDFC
* If you have investments in EPF & PPF, go for higher exposure in equity for NPS
* Young investors can go for aggressive life cycle fund, where maximum equity allocation is 75% till 35 years of age
* NPS data show 7-year equity returns between 12.83%-14.33% across nine pension funds