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, let's take a look at two alternative investment options of NPS and their upsides.

What are the investment options under NPS?

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.

NPS Active Choice: Individual Funds

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 instruments
• Asset class C - Corporate debt and related instruments
• Asset class G - Government Bonds and related instruments
• Asset 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 Choice

Age (years)	Max. Equity Allocation
Upto 50	75%
51	72.50%
52	70%
53	67.50%
54	65%
55	62.50%
56	60%
57	57.50%
58	55%
59	52.50%
60 & above	50%
Source: npscra.nsdl.co.in

NPS Auto Choice: Lifecycle Fund

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 subscriber's 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 individual's 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:

LC75 - Aggressive Life Cycle Fund

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 E	Asset Class C	Asset Class G
Up to 35 years	75	10	15
36	71	11	18
37	67	12	21
38	63	13	24
39	59	14	27
40	55	15	30
41	51	16	33
42	47	17	36
43	43	18	39
44	39	19	42
45	35	20	45
46	32	20	48
47	29	20	51
48	26	20	54
49	23	20	57
50	20	20	60
51	19	18	63
52	18	16	66
53	17	14	69
54	16	12	72
55 years & above	15	10	75
Source: npscra.nsdl.co.in

LC50 - Moderate Life Cycle Fund

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 E	Asset Class C	Asset Class G
Up to 35 years	50	30	20
36	48	29	23
37	46	28	26
38	44	27	29
39	42	26	32
40	40	25	35
41	38	24	38
42	36	23	41
43	34	22	44
44	32	21	47
45	30	20	50
46	28	19	53
47	26	18	56
48	24	17	59
49	22	16	62
50	20	15	65
51	18	14	68
52	16	13	71
53	14	12	74
54	12	11	77
55 years & above	10	10	80
Source: npscra.nsdl.co.in

LC25 - Conservative Life Cycle Fund

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 E	Asset Class C	Asset Class G
Up to 35 years	25	45	30
36	24	43	33
37	23	41	36
38	22	39	39
39	21	37	42
40	20	35	45
41	19	33	48
42	18	31	51
43	17	29	54
44	16	27	57
45	15	25	60
46	14	23	63
47	13	21	66
48	12	19	69
49	11	17	72
50	10	15	75
51	9	13	78
52	8	11	81
53	7	9	84
54	6	7	87
55 years & above	5	5	90
Source: npscra.nsdl.co.in