New Pension System: The Pension Fund Regulatory and Development Authority (PFRDA) has introduced a new investment option called the “Balanced Life Cycle Fund” (BLC) under the National Pension System (NPS) as of October 1, 2024. This fund aims to help subscribers automatically adjust their investment based on their age and risk tolerance.
What is the Balanced Life Cycle Fund (BLC)?
The BLC will allocate assets in a way that changes as subscribers age. For younger investors, the fund will have a higher percentage of equities (stocks), which can offer better returns but come with higher risk. As investors grow older, the fund will gradually shift to safer investments.
Asset class distribution by age
The Balanced Life Cycle Fund adjusts its asset allocation based on age to help manage risk. For subscribers up to 45 years old, the distribution is 50% in equity, 30% in corporate bonds and 20% in government bonds.
As subscribers age, the equity percentage gradually decreases while the allocation to government bonds increases. For example, at age 50, the distribution is 40% equity, 20% corporate bonds and 40% government bonds. By age 55 and beyond, the allocation shifts to 35% equity, 10% corporate bonds and 55% government bonds, focusing on safer investments as retirement approaches.
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NPS investment options for subscribers
Currently, NPS subscriber have two modes available for investment – Active and Auto.
NPS Active choice investment
As the name suggests, subscribers have control over the allocation of their funds under the Active choice. Under Active choice, an NPS investor is allowed to increase the maximum equity allocation to 75% till the age of 50 years. This allocation has to come down to 50% by the time the subscriber’s age reaches 60 years. The balance is allowed to be invested in government securities, corporate bonds and alternative investment funds. Investors also note that allocation to alternative investment funds should not exceed 5% of the contribution amount.
Auto choice investment under NPS
Under the auto choice investment option, which is also known as the Lifecycle fund, investors have three options available, namely – 1) LC75 – Aggressive Life Cycle Fund, 2) LC50 – Moderate Life Cycle Fund and 3) LC25 – Conservative Life Cycle Fund.
Equity allocation under NPS Auto choice investment
All three investment options allow investors to have higher allocations towards equity until the age of 35. After 35, the equity allocation keeps decreasing gradually. For instance, LC75 allows a maximum equity allocation of 75% until age 35 and the equity contribution reduces with time as the NPS subscriber approaches 55. Similarly, LC-50 allows an investors to go for a maximum equity allocation of 50% until age 35. Under LC50, this equity exposure keeps decreasing every year until NPS subscriber reaches the age of 55.
According to the PFRDA circular, “The maximum equity allocation under Balanced Life Cycle Fund shall be 50% which shall taper down after the age of 45 years as compared to 35 years under existing life cycle funds.”
The PFRDA, however, has clarified that there won’t be any changes in existing choices like Active an Auto choices under NPS. The Balanced Lifecycle Fund will be an additional investment option. The existing Moderate Life Cycle Fund (LC50) will continue to be the default choice, the PFRDA said.