National Pension System (NPS) Investment Choices Explained

National Pension System (NPS), a government-sponsored retirement planning instrument regulated by the Pension Fund Regulatory and Development Authority (PFRDA), enables the subscriber to set his or her own choice for fund allocation to different asset classes. A National Pension System account gives an individual an option to set allocation to asset classes such as government securities, equity market instruments, corporate debt and alternative investment funds. The subscriber can exercise this option by selecting an "active" approach to allocate money. NPS offers a number of funds and investment options, and two types of investment modes - active and auto - to the subscriber, according to pension regulator PFRDA's website - pfrda.org.in.

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For example, in case the subscriber does not want to exercise the option of setting his or her own preference, the money is invested under the "auto choice" mode, according to regulator PFRDA's website. In the auto option, the money is invested in various type of schemes based on the subscriber's age. 

Here are key things to know about NPS (National Pension System) investment modes - auto and active:

Active choice

One of the two approaches to allocating the money invested in NPS to the available asset classes is the “active” option. In this mode, the NPS subscriber gets the option to actively decide as to how his or her NPS pension wealth is to be invested in different asset classes, according to the PFRDA website. 

In other words, the NPS subscriber can distribute his or her pension wealth across asset classes E (predominantly equity market instruments), C (fixed income instruments other than government securities), G (government securities) and A (alternative investment funds), subject to conditions as may be prescribed by the regulator.

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The subscriber can choose to invest the  entire pension wealth in classes C or G, a maximum of 50 per cent in class E, and a maximum of 5 per cent in class A, according to the PFRDA website. 

Auto choice

NPS also offers another option, aimed at participants without the required knowledge to manage their investments. In case the subscriber does not exercise the choice to set the asset allocation, his or her funds are invested according to the “auto” option.

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The proportion of funds invested across three asset classes E, C and G, is determined by a pre-defined portfolio (which changes according to the age of the subscriber), with the investment in E decreasing, and increasing in C and G with the age of the subscriber, according to the regulator. 

National Pension System offers three life cycle funds under the auto choice: LC75- Aggressive Life Cycle Fund (exposure in equity starts with 75 per cent  till age 35 and gradually reduces with the subscriber's age), LC50-Moderate Life Cycle Fund (exposure in equity starts with 50 per cent  till age 35 and gradually reduces with the subscriber's  age), and LC 25-Conservative Life Cycle Fund (exposure in equity starts with 25 per cent till age 35 and gradually reduces with the subscriber's age), according to the regulator. The default option under auto is Moderate Life Cycle Fund, according to the PFRDA website.