Understanding Active and Auto Choice in NPS Investments in India

Welcome to the world of Secure Savings with the National Pension System (NPS) in India. This retirement investment scheme is designed to help citizens aged 18 to 70 create a robust retirement corpus. Before you invest, you need to decide between two investment options: Auto Choice and Active Choice. Both offer unique benefits, but they work quite differently.

Active Investment Choice

Active investment choice is a flexible option that allows you to allocate your investments across different asset classes based on your preferences and risk appetite. Once you select the active option, you can decide the percentage allocation for each asset class. The NPS offers four primary asset classes, each with diverse investment options:

Asset Class E: Equity and related instruments Asset Class G: Government Bonds and related instruments Asset Class C: Corporate Debt and related instruments Asset Class A: Instruments like CMBS, MBS, REITs, AIFs, and InVITs

However, there are regulations in place, particularly for asset allocation to equities. If you are under 50 years old, the maximum permissible allocation to equities is 75%. After reaching 50, this limit reduces by 2.5% every year until it reaches 50%. The exact allocation is as follows:

Asset Class Maximum Allocation Equity (Asset Class E) 75% (max) until age 50, then decreases by 2.5% annually Asset Class A (Alternatives) 5% maximum

Auto Investment Choice

The auto choice option is a simpler solution with automatic portfolio management. Under this option, you can choose from three lifecycle funds, each with a different risk profile: Aggressive, Moderate, and Conservative. These funds automatically adjust the asset allocation as you age, reducing exposure to risky asset classes like equity as you near retirement age.

Here’s a breakdown of the lifecycle funds:

Aggressive Life Cycle Fund LC75: Higher equity exposure (up to 75%) Moderate Life Cycle Fund LC50: Balanced approach with maximum equity exposure of 50% Conservative Life Cycle Fund LC25: Lower risk profile with maximum equity exposure of 25%

These lifecycle funds automatically rebalance your portfolio annually, ensuring that you have a balanced and low-risk portfolio as you approach retirement age. This option is ideal for those with no expertise in investment management and a low-risk appetite.

Choosing Between Active and Auto Choice

Deciding between active and auto choice depends on your investment knowledge and risk tolerance. If you have no experience in financial markets and are comfortable with a lower-risk approach, auto choice is a good starting point. However, if you are willing to take on higher risks and seek professional advice, active choice offers more flexibility and control.

It's also important to monitor the performance of your NPS contributions and the allocation of units over time. As you gain experience, you may find that you're ready to switch to active choice, giving you more control over your investments.

Conclusion

Both active and auto choice options in NPS serve their purpose well. If you're unsure about which route to take, consider starting with the default auto choice, especially if you lack investment expertise. Once you see how your contributions are allocated and perform, you may feel more confident in managing your own investment choices.

Thank you for your interest in NPS investments in India. Stay informed and make the best decisions for your future!