De-jargoned: Active and auto choice in NPS

Photo: Hemant Mishra/Mint

Photo: Hemant Mishra/Mint


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The National Pension System (NPS) is targeted at creating a nest egg for your retirement years. Being a market-linked, defined-contribution product, the corpus purely depends on funds that you choose and their performance. You can begin with a minimum annual contribution of Rs1,000. At 60 years of age, you can buy an annuity—a pension product that gives periodical payouts—with at least 40% of the corpus. The remaining can be taken lump sum. Being a retirement product, NPS discourages early withdrawals by mandating you to annuitize at least 80% of the money. However, partial withdrawals are allowed for certain events. There are four investment funds that it currently offers. And you can choose from two investment strategies—active choice and auto choice. Here are the details.

Active choice

There are four investment schemes under Active Choice. Scheme G invests in government securities, scheme C in fixed income instruments other than government securities, scheme E in equities and scheme A in alternative investment funds. You can choose to put your money in any of the four scheme and in the proportion that you like, but scheme E currently has a cap of 50%, you can’t put more than 50% of your money in equities, and scheme A has a cap of 5%.

The Pension Fund Regulatory and Development Authority (PFRDA) is contemplating hiking the equity allocation to 75%. NPS also offers eight pension fund managers to choose from, and each of these fund managers offer all the four funds. You can choose one fund manager to make your investments. NPS allows you to change your fund manager once and your asset allocation twice a year.

Auto choice

While active choice is meant for people who want a greater say in their asset allocation, auto choice is meant for people who prefer a more passive approach. The auto choice option adopts a life-cycle based approach, so it starts with an equity-heavy portfolio during the younger days of the investors and systematically reduces the equity exposure as the investor approaches retirement. A life-cycle based approach not only optimises returns but also cushions you from market volatility as you approach maturity. You can opt for auto choice with any of the pension fund managers. In order to offer you more flexibility, NPS now offers three options. The conservative life cycle plan is meant for risk-averse investors, as the maximum allocation to equity is 25% till 35 years of age. After that the equity allocation begins to taper and by the time the investor is 55 years of age, the equity allocation is only 5%. The moderate life cycle fund starts with a 50% allocation to equity till 35 years of age and tapers it to 10% by age 55. The aggressive life cycle fund starts with equity allocation of 75% till 35 years of age and tapers it to 15% by age 55.

Under the auto choice option, your money gets invested only in scheme E, scheme C and scheme G, in a manner that by the time you are close to retirement, the asset allocation is predominantly scheme G. Scheme A is not available under the auto choice option.

You can change your fund manager, life cycle options and the investment strategy under the auto choice option as well.