Planning for a peaceful retirement? The National Pension System (NPS) offers its subscribers the opportunity to retire with pride. This document gives a basic understanding of the types of asset classes and fund allocation strategies, depending on your type of investor and risk appetite. Do you like a more hands-on or a hands-off approach as an investor?
With trusted pension fund managers like HDFC Pension, you can expect professional management of your NPS account. Let’s explore the types of classes/categories, asset classes/categories, and investment strategies available to you as an NPS subscriber looking to build a sustainable retirement corpus.
Which are the Asset Class/Categories Available for NPS Subscribers?
Before starting your NPS journey, it’s important to understand the types of asset classes/categories. These are divided into four primary asset classes.
- 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 Commercial Mortgage-Backed Securities (CMBS), MBS, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs)
Within NPS, they are profiled as below in terms of risk exposure.
| Fund Options | Risk Profiling | Exposure Limit |
| Equities | High | Up to 75% |
| Corporate Bonds | Moderate | Up to 100% |
| Government Securities | Low | Up to 100% |
| Alternate Investment Funds | Very High | Up to 5% |
Within the above-mentioned asset classes, an NPS subscriber can choose between active choice and auto choice.
What is an Auto and Active choice
NPS offers to its subscriber’s two types of choices when it comes to allocation of investment funds i.e. the active choice and auto choice.
- Active Choice: In active choice, your pension fund manager, such as HDFC Pension, offers subscribers the flexibility to choose between various asset classes/categories, such as Equity, corporate bonds, government securities, and AIFs. Here, subscribers with a basic financial understanding can have more control over their NPS account with active allocation management across asset classes/categories. However, the maximum allocation in the Equity asset class can go up to a maximum of 75% up to the age of 50 years. This exposure will reduce by 2.5% with every passing year. You can invest up to 100% in asset classes C and G, within a maximum of up to 5% in asset class A.
| Asset Class | Maximum allocation of investment in the asset class |
| E | Up to 75% |
| C | Up to 100% |
| G | Up to 100% |
| A | Up to 5% |
- Auto Choice: This is a relatively easy option for NPS subscribers who do not have the required knowledge to manage their NPS investment. In Auto Choice, your pension fund manager, such as HDFC Pension, offers lifecycle fund management. Here, investors can choose one among the four automated lifecycle funds based on their risk appetite. NPS subscribers choose from the four subcategories of auto-choice,
- LC-25 – Conservative Life cycle fund
- LC-50 –Moderate Life cycle fund.
- LC -75 – Aggressive Life cycle fund
- Balanced Fund – It offers a more balanced, aged-based approach to portfolio allocation.
Here, the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as the subscriber ages). Auto Choice is the best choice for subscribers who want to automatically reduce exposure to more risky investment options as they get older. As age increases, the individual’s exposure to Equity and Corporate Debt tends to decrease.
Which Allocation Strategy Fits Best for You?
If you are an individual with sound/basic financial knowledge and understanding of asset classes, then the active choice is for you. It gives you greater control over NPS Investments based on your risk appetite. You can also choose your pension fund manager, such as the HDFC Pension fund manager. If you prefer having a more hands-off approach to your NPS investments, then auto-choice life cycle choice works best.
Subscribers can shift between asset classes and investment choices twice in a financial year for both Tier I and Tier II accounts. Pension fund managers can be changed once every financial year.
Conclusion
With NPS, you are empowered to take an informed approach by choosing the right investment strategy/allocation strategy that works for you. With fund managers like HDFC Pension, you can choose asset allocation, such as active or auto choice. Based on your risk appetite and financial knowledge, choose the best investment fund for you and take a step closer to your financial freedom. Secure your future with NPS today.
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