Investment Options Under the NPS Scheme

National Pension Scheme (NPS) is a savings plan that gives you the opportunity to save for retirement through regular and disciplined investment. The NPS scheme was introduced by the Government of India. The government launched it as a replacement for its regular pension scheme for employees who joined the service after January 1^st, 2004. But later it was expanded to include all Indian citizens. The fund is regulated by the PFRDA.

The main purpose of the NPS Scheme

This scheme aims to provide financial security to people after they retire. The government also offers tax rebates on money deposited under the NPS scheme. This has been done to encourage people to participate in this system and develop a habit for saving.

Who can invest in National Pension Scheme?

All Indian residents can invest in this national pension scheme. It does not matter if they are employed in the private or public sector or self-employed. You can start with a minimum payment of only Rs 100 per person per year for NPS.

Different investment options under NPS?

NPS allows persons to choose from several Pension Fund Managers or PFM. Then there are four asset classes, two investment options available. These options are based on risk-taking capability, time horizon, and other personal factors.

Pension Fund Manager (PFM)

You can opt for any of the total eight available PFM, who overlook the funds under the National Pension Scheme.

You can select one of these entities as your PFM when investing in this scheme.

1. LIC Pension Fund.
2. UTI Retirement Solutions.
3. Aditya Birla Sun Life Pension Management.
4. HDFC Pension Management.
5. ICICI Prudential Pension Fund Management.
6. Reliance Capital Pension Fund.
7. SBI Pension Fund.
8. Kotak Mahindra Pension Fund.

Asset Classes

Pension fund managers invest your money in 4 distinct asset classes:

1. Class E – Equity and equity-related investments.
2. Class G – Bond and other securities backed by the Government.
3. Class C – Corporate debt and debt-related instruments.
4. Class A – Alternative investment funds such as real estate investment trusts, infrastructure investment trusts and others.  

Investment options

Now let us explore the investment options available under National Pension Scheme to help you understand the opportunities under the scheme and make the right choice.

Active Choice

If you are confident about managing your own funds and have the knowledge to do so effectively, this NPS Scheme choice is ideal for you. It allows you to choose from multiple funds and decide on allocation across the four asset classes discussed above. This enables you to diversify your fund as well.

This option of the National Pension Scheme gives freedom. There are certain restrictions on the amount of allocation into equity and equity-linked instruments based on your age. This has been done to reduce the overall risk exposure of your portfolio. This ensures that you don’t lose money unnecessarily.

For example, if you are aged 50 years or less, you can invest up to 75% of your money in equity and equity-linked instruments. This percentage allocation, however, keeps reducing as you age. Once you reach the age of 60, you are allowed to invest a maximum of 50% of your portfolio into equities.

However, this restriction exists only for equity and equity-linked instruments and not for the rest of the asset classes.

Auto Choice

If you lack experience in financial markets and instruments, this option is suitable for you. Through this option of the NPS scheme, instead of choosing where to invest, you can delegate the decision to an experienced fund manager.

The auto choice of the National Pension Scheme includes three risk base investment options:

i) Conservative Life Cycle fund or LC25: As the name suggests, this is the conservative option available under the auto choice of the National Pension scheme.

LC 25 allows a maximum allocation of 25% into equity and equity-linked instruments (asset class E) and 45% in corporate debt and debt-related instruments (asset class C) for investors aged 35 years or less.

This allocation percentage reduces as you become older, reaching 5% for asset classes E and C when you reach the age of 55.

Investment in asset class G – government bonds and such instruments is treated in a reverse manner. You are allowed to invest a maximum of 35% into government bonds up to the age of 35, while you can invest up to 90% once you reach 55 years of age.

ii) Moderate Life Cycle Fund or LC 50: This is a balanced fund which aims to generate stable returns for you. Hence, the maximum allowed amount in equity starts at 50% and corporate debt at 30% (for 35 years or less) and goes down to 10% for both of these as you become 55 years or older.

On the other hand, if you are aged 35 years or less, you will be allowed to invest a maximum of 20% in government debt. This percentage increases as you age, reaching 80% once you reach 55 years of age.

iii) Aggressive Life Cycle Fund or LC 75: This is a growth fund designed to grow faster than the other options. If you are aged 35 years or less, you can invest 75% into equity. This amount keeps reducing, reaching 15% once you are 55 years or more.

Government and government-backed bonds are treated the same way as the other two options. You can invest 15% if you are 35 years or less. The allocation percentage increases as you grow older. You can invest 75% of your fund in these kinds of bonds once you are 55 years or above. However, asset class C – corporate debt and the debt-related instrument are treated differently from the other two options, increasing with age instead of decreasing.

Investing in the National Pension Scheme is a smart decision to enable you to build a corpus for your future. However, explore the various investment options available under the NPS scheme before making investing your money to ensure the fund performs as per your risk appetite and return expectations. Thorough research can be immensely beneficial in the long run. Visit Piramal Finance to access blogs and articles to improve your NPS skills.