Saturday, 23 April 2016

National Pension System(NPS) investment choices - Active or Auto

National Pension System offers two types of investment choices.

  • Auto choice
  • Active choice

Before going into the details of these two choice one more thing you should know is the Asset classes where your money is invested when you contribute to NPS.

Asset Classes permitted for NPS

There are 3 types of asset classes which are permited for NPS funds investment. These assets are segregated based on the risk they carry -

  • Equity (Asset Class E) - Investments in predominantly equity market instruments. According to new rules for private sector emplyees apart from exchange traded funds now fund managers can also invest in other stocks (listed in BSE or NSE with M-cap of 5,000 crore), units of mutual funds in addition to exchange traded funds.

    Note that maximum investment in this class is 50% of total contribution whether you choose active choice or auto choice.

  • Corporate Bonds (Asset class c) - Investments in Corporate bonds, that may be PSU bonds as well as private companies bonds. Some of the examples are infrastructure bonds that were issued by PSUs, non-convertible debentures of PSUs or private companies.
  • Government Securities (Asset class G) - Investments in Government securities.

So these are the assets where your contribution is invested. Now let's see the investment choices you have in National Pension System (NPS) and how they work.

Active Choice

If an individual choses active choice then he can decide on the asset classes in which the contributed funds are to be invested and their percentages. Note that in Asset class E maximum contribution can't go beyond 50% even in active choice. Though subscriber can invest 100% of contribution to Government Securities or Corporate Bond Fund if he wants to do that.

Auto Choice

If an individual doesn't have the required knowledge or doesn't want the headache of tracking and adjusting his NPS investments, he can opt for Auto choice. Under this choice management of investment of funds is done automatically based on the age profile of the subscriber. At each birthdate of the subscriber, these proportions are adjusted with age as mentioned in the life-cycle matrix.

Age E (%) C (%) G (%)
< = 35 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 36 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 10 10 80

So you can see here that from Age 18 - 35 allocation of investment to equity (Asset class E) is fixed at 50%, corporate bonds (Asset class C) is fixed at 30% and government securities (Asset class G) is fixed at 20%. Once you reach 35, at every birth date allocation to E type will reduce by 2% and allocation to C type will reduce by 1% per year while the allocation to government securities will increase by 3% every year. This automatic shift will continue till the investor age is 55, by that time the allocation to E, C and G would have become 10%, 10% and 80% respectively. After that it continues the same way till the age of 60.

Switching between active and auto choice

Switching between the active and auto choice is permitted but can be done only once in a year. The subscriber has to submit the physical application form (Form-UOS-S3/CS-S3) to change Scheme Preference. A subscriber under the Corporate model can exercise this option only if the option has been provided to the subscriber by the Corporate. But such changes can be done only once in a financial year. In case the Subscriber wants to change Scheme Preference for both the Tiers then the Subscriber should submit separate forms for each Tier. The subscriber can submit the request to his / her POP/POP-SP through whom the subscriber has opened the NPS account. Please collect a 17 digit acknowledgement number against your request.

Note one more thing here - For government employees central/state, the contribution of all the Subscribers is invested in the default scheme (If they opt for Auto choice). In the default scheme, the contribution is allocated to three PFMs, viz. SBI Pension Funds Private Limited, UTI Retirement Solutions Limited and LIC Pension Fund Limited in a predefined proportion and each of the PFMs will invest the funds in the proportion of 85% in fixed income instruments and 15% in equity and equity related instruments. Scheme Preference change option is not available to Govt. subscribers for Tier I.

That's all for this topic National Pension System(NPS) investment choices - Active or Auto. If you have any doubt or any suggestions to make please drop a comment. Thanks!


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>>>Go to Pension Plans page

3 comments:

  1. I have a query, If i find that due to market movements and bull run in equity, my portfolio is now comprising 75% of equity (after capital gains), and I want it to shift part of existing accumulated equity portion to the Debt portion, how can I do the same?


    ReplyDelete
    Replies
    1. If I am not wrong that is done by system itself (Auto rebalancing) even for Active choice. If corpus in Equity Fund breaches the 50% threshold, system driven Auto – Rebalancing of Portfolio technique is carried out on next date of birth of the subscriber. Units worth excessive corpus are redeemed from the equity corpus and invested in the other 2 asset classes in the pattern selected.
      You can find details here - http://pfrda.org.in/

      Delete
  2. Which one is better for government employees, active or auto choice?

    ReplyDelete