The Pension Fund Regulatory and Development Authority (PFRDA) has recently announced the option to invest up to 75 per cent in equities under the active choice option of the National Pension Scheme (NPS). The subscribers are now allowed to make partial withdrawals for higher education, acquiring professional and technical qualifications or for setting a new business.
NPS offers its investors two choices for deciding their asset allocation across asset classes — auto and active choice. In NPS, investors can spread their investments across four assets classes: C (corporate debt), G (Government Securities), A (alternate assets) and E (equities). Under auto choice, investors can put money in any of three Lifecycle funds — aggressive, moderate and conservative. In these lifecycle funds, allocation to various asset classes changes based on the subscriber’s age. In the aggressive lifecycle fund, allocation to equity is 75 per cent until 35 and then declines to 15 per cent by 55. In the moderate fund, allocation to equities is 50 per cent until 35 and the declines to 10 per cent by 55. And in the conservative fund, equity allocation is 25 per cent until 35 and then declines to 5 per cent by 55.
Apart from the change in equity, the PFRDA has changed the investment grade rating from ‘AA’ to ‘A’ for corporate bonds. The pension funds can not invest more than 10 per cent of their overall corporate bond portfolio in ‘A’ rated bonds.
In active choice, the investor decides how much allocation he would like to have in different asset classes. This allocation remains constant until the investor decides to change it. Earlier, allocation to equities under the active choice option was capped at 50 per cent. NPS already offers 75 per cent equity allocation under the auto-choice option. Now the investors have the option of the same level of equity allocation under the active choice option as well. At present, the NPS’s total private sector scheme assets under management stand at Rs 27,900 crore.
NPS is used for a long-term goal like retirement. Allowing younger investors to have higher exposure to equities will give them a chance to earn higher returns. It enables their NPS portfolio returns to beat inflation meaningfully. Under NPS, the equity fund is actively managed and you have the option to choose from eight fund managers currently.
For higher returns, equity is considered as the only asset class to generate high returns. A liberal allocation attracts more subscribers to equity. It is recommended to opt for 75% equity allocation in the investment, especially to the young investors. The actively-managed NPS fund is capable of generating an alpha but, investors have another incentive like extra deduction of Rs 50,000 under section 80CCD(1b) of the Income Tax Act, which is in addition to the overall deduction of Rs 1.5 lakh under section 80C.