How to determine the best asset allocation for your NPS Investments?

What does the NPS do for its investors or subscribers? It is a reliable pension source. This is best suited for those subscribers who are unable to generate regular income from their retirement funds.

Sadly, many investors invest in the scheme only to get a tax deduction of ₹50,000. This is the wrong approach if you want to invest for long-term capital gain. Moreover, asset allocation is also crucial to maximizing the NPS investment yield.

How to Choose the Right Asset Allocation for Your NPS Tier 1 Account?

NPS is a clear fund contribution scheme. Here you make regular contributions to the fund. The returns on investment generated during the NPS withdrawal depend on the portfolio asset allocation.

1. Active and Auto Choices

In Active Choice, the subscribers choose their asset allocation with certain limits – A maximum of 75% in equity till 50 years. The upper limit tapers by 2.5% each year till 60 years (up to 50% of the funds).

In Auto Choice, the subscribers don’t make any asset allocation decisions. There are three investment Life Cycle Funds choices:

Aggressive Life Cycle Fund (LC75) – These funds have an upper limit of 75% equity up to 35 years. Afterwards, it reduces down to 15% by 55 years.

Moderate Life Cycle Fund (LC50) – These funds have an upper cap on 50% equity up to age 35 years. Afterwards, it reduces down to 10% by 55 years.

Conservative Life Cycle Fund (LC25) – These funds have an upper limit on Equity of 25% up to 35 years. Afterwards, it tapers down to 5%.

Know How You Should Select the Asset Allocation for Your NPS savings

NPS should be a portion of your retirement savings portfolio. It should not be the only standalone investment. It will be wiser to invest for your retirement in EPF, PPF and equity funds also.

Choosing the Right Allocation

Here are a few tips to help you make the right asset allocation:

1. For younger people up to 40 years, be aggressive with your retirement savings. Allot copiously to equities. Include NPS in the investment mix.

2. The mid-40s or higher age group should allot a bigger portion of the funds to debt savings (EPF plus PPF). In NPS, invest largely in equities.

3. If your PF corpus isn’t chunky and you have invested heavily in equity funds, then be conservative with NPS for the safety of funds.

Conclusion

These are some normal approaches to having the right mix of investments. You have unique requirements as an individual investor. It makes sense if you take your own decision. If you feel nervous about making a decision alone, take investment advice from a good investment advisor.

Author: Sreekanth Nadella, MD and CEO – KFintech