Active & Auto Choice of NPS: All You Need To Know About

When you invest in NPS, it gives you two options for managing your money:

• Active Choice
• Auto Choice

The Active choice is for people who want to actively manage the asset allocation in their NPS portfolio. Those who choose not to participate in portfolio decision-making should select the Auto choice. As an investor, you can choose to hire pension fund managers to handle your investments or if you need any assistance. Let’s take a closer look at these two options now.

What is Active Choice in NPS

In active choice NPS, as an investor, you have the right to choose how your contribution can be invested actively. In each Pension Fund Manager (PFM) under the NPS scheme, you need to provide the PFM, Asset Class, and percentage allocation. 

The allocation under a single PFM must be specified from among the following four asset classes: equity, corporate debt, government bonds, and alternative investment funds.

As shown below, as a subscriber, you can choose more than one asset class under a single PFM:

• Up to the age of 50, a maximum of 75% of the entire asset allocation may be invested in equity.
• The equity allocation matrix provided below will determine the maximum allowable equity investment for individuals 51 years of age and above. The subscriber’s date of birth will determine the matrix used for the tapering off of the equity allocation.
• For Alternative Investment Funds, the percentage contribution value cannot be greater than 5%.
• The entire distribution across the asset classes E, C, G, and A needs to match 100%. 

What is Auto Choice in NPS

NPS provides an easy solution to subscribers who do not have the expertise to handle their NPS investments. Investing will take place in a life-cycle fund under this auto choice. The allocation of funds among three asset classes will be decided by a pre-established portfolio that will vary based on the age of the subscriber.

LC75 – Aggressive Life Cycle Fund

This Life cycle fund limits equity investments to 75% of total assets. Up to the age of 35, the subscriber’s exposure to equity investments is 75%; after that, it progressively decreases based on their age. This fund is best suited to investors who are willing to take on more risk. 

LC50 – Moderate Life Cycle Fund

This Life Cycle Fund has an equity investment cap of 50% of total assets.  Up to the age of 35, subscribers have a 50% equity investment exposure, which progressively decreases as they get older. This might be more appropriate for you if you’re an investor searching for a well-balanced portfolio.  

LC25 – Conservative Life Cycle Fund

This life cycle fund caps the amount of assets available for equity investments at 25%. Up to the age of 35, the subscriber’s exposure to equity investments is 25%; beyond that, it progressively decreases based on their age. This is best suited for investors who have a very low-risk appetite.

Limited Equity Exposure In Active and Auto Choice

In the active choice as an NPS subscriber, you can devote up to 75% of your allocation to equity exposure. On the other hand, it is possible to allocate 100% of one’s funds to either government or corporate bonds.

However, in auto choice, the equity exposure is further limited. The maximum equity exposure in the Auto Choice option is allowed by the Aggressive Life Cycle Fund. However, the subscriber’s equity exposure steadily decreases to 15% as they get closer to 55 years old.

The PFRDA (Pension Fund Regulatory and Development Authority) developed this strategy to reduce the impact of equity investment market volatility as subscribers get closer to retirement.

Flexibility To Switch NPS Investment Option

NPS gives its customers the choice to switch their preferred plan. Depending on his age and anticipated future income needs, the subscriber can realign his investment in asset classes E, C, and G. Additionally, the subscriber can alter the investing option (active vs. auto) and PFM. With NPS, you have the opportunity to switch up your investing scheme four times a year and your fund manager once. 

NPS Auto Or Active, Which Is Better

Now that you know the two options, you need to know how to decide between the active and auto NPS investing options. Your financial objectives and risk tolerance will determine which NPS investment is appropriate for your account. 

If you are a new NPS subscriber, or if you have a low-risk appetite and want to guarantee that your portfolio aligns with your risk tolerance as you grow older, the auto choice NPS investment option may be the best NPS investment option for you. 

In this approach, the decision of how much to assign to each asset class is made automatically. You can move to the active investment scheme after you have a better understanding of what interests you. 

However, if you are more conscious of the level of risk you are willing to accept, you might discover that the active option is the ideal NPS investment for your portfolio. Remember that this is an investing option in NPS that you ought to choose only if you are well-versed in the various asset classes and markets.

Frequently Asked Questions (FAQs)