By Amit H L
For years, the National Pension System (NPS) was largely viewed as a simple retirement investment: choose a pension fund, select an investment option and continue contributing until retirement.
That mental model needs to change. With the introduction of the multiple scheme framework for non-government subscribers, NPS now allows investors to choose multiple schemes across one or more pension funds. The investment universe is also becoming more differentiated, with schemes offering different combinations of equity, fixed income and other permitted assets.
Building a portfolio
An investor can now consider diversification not just across asset classes, but also across pension fund managers and investment strategies. The objective need not be to pick the scheme that delivers the highest return in a particular market cycle. It can be to construct a combination where different investment approaches play different roles within the overall portfolio. For example, an investor can choose three schemes with different risk and investment characteristics and decide that 50% of the portfolio should go to one, and 25% each to the other two.
Diversification is about ensuring that one investment approach does not determine the outcome of your entire retirement portfolio. The next challenge is ensuring that every new contribution follows the portfolio one has decided to build, without having to allocate each contribution manually.
This is where the new default contribution allocation (DCA) functionality becomes useful. A subscriber can specify the percentage allocation across selected schemes, with subsequent contributions bifurcated according to those percentages. He can change these allocation choices online whenever he wants.
As an example, consider a simple portfolio allocation: Scheme 1: 50%, Scheme 2: 25% and Scheme 3: 25%. If the next NPS contribution is Rs 10,000, Rs 5,000 gets allocated to Scheme 1, while Rs 2,500 each goes to Schemes 2 and 3, based on the defined allocation.
This can be relevant for corporate NPS. An employee’s contribution through payroll need not become a fresh investment decision every month. Once the allocation is established, subsequent contributions can follow the chosen portfolio structure.
Market-linked portfolio
It is possible to think of NPS as a market-linked retirement portfolio rather than simply a pension account. Investors have greater choice in selecting schemes, can construct a portfolio around their goals and define how future contributions are distributed across those choices. This also makes portfolio management more meaningful. As one’s age, financial goals and risk appetite change, the allocation can be adjusted within the NPS framework. NPS is no longer only about where your retirement money is invested. It is increasingly about how you construct and manage that money over a long investment journey.
The writer is founder & CEO, Floatr Wealth
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Investors should assess their financial goals, risk appetite and consult a qualified financial advisor before making investment decisions.
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