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Asset Allocation Strategies for your NPS investment

Introduction

Don’t you wish for a well financially cushioned and relaxed retirement? Of course, you do! Who doesn’t? You can pave your way for it by creating an aggressive investment plan. One of the popular investments tools that investors choose in this regard is NPS. It optimally utilizes your savings over the years, protects them from volatility, and grows them well to give you a dependable source of pension post-retirement.

What is NPS?

NPS or the National Pension Scheme doubles up as an investment plan and a pension scheme. The Indian Government developed this tool to provide a reliable source of financial security to its citizens in old age. Your earnings in this scheme are in tune with the financial market returns. It also offers excellent tax benefits along with flexible investment terms. Upon retiring, you can enjoy the help of this scheme by way of a regular pension income as well as a lump sum corpus for a bump-free post-retirement ride.

Additional Read: NPS Features & Benefits you need to know

Additional Read: NPS Investments Tax Benefits

Understanding the Multiple Asset Classes in NPS

NPS is an exciting way to invest your funds through timely contributions at a time in different asset classes. More so, you can also decide the proportion of the funds that you want to be allocated towards each asset category for the best possible returns.  Here is the list of asset classes across which your funds can be spread in NPS,

Equities

Equities are the most popular among investors as they can offer great returns over a long period. Here your investments are in stocks and other equity-related instruments.

Government Securities

That is the safest asset class of the lot, but it comes with low returns and a low liquidity quotient. Here your investments are made in Government listed securities like State and Central Government bonds, Money-market instruments, etc.

Corporate Debt

The funds in this asset class are primarily invested in corporate bonds issued by corporates, large-scale Infrastructure firms, Public Sector Units, etc.

Alternative Investment Funds

That is a reasonably new asset category where the funds are allocated towards investments in Real Estate and Infrastructure Trusts, Mortgage-Backed Securities, etc.

Allocation of Assets for your NPS

There are several asset classes, and each asset class comes with a set of pros and cons. That can make it tricky for you to understand which asset class will be the right pick for your NPS investment and what proportion of funds should you allocate to it. To ease your troubles, we have listed some basic thumb rules that you can follow for an ideal NPS investment asset allocation.

There are two broad routes to approach your NPS Asset Allocation Strategy – Auto and Active. Let’s have a closer look to under each means,

Auto Asset Allocation

As the name suggests, this follows an automated asset allocation method. As per this choice, the asset allocation and the plan of your fund keep modifying as you grow old and reach retirement. When you are young, the assets are concentrated towards higher returns, but as you age towards retirement, the asset allocation changes to preserve wealth from short-term volatility. The Auto option in NPS has created three unique ‘Life Cycle Funds’ (LC) based on their principle of asset allocation modification with age as a criterion to accomplish different financial goals.

Aggressive Life Cycle Fund

In the Aggressive Life Cycle Fund, 75% of your funds will be allocated to equity until 35 years old. After that, 4% of your NPS equity allocation will be shifted towards Government Securities and Corporate Debt category with every passing year. This allocation strategy will take place for the existing fund corpus as well as fresh funds. The 75% allocation to equity at the beginning of the investment tenure lets you aggressively gather high returns from markets. Then, the gradual shift of the funds towards the safer asset classes is to preserve the accumulated wealth from any volatility risks.

Moderate Life Cycle Fund

In the Moderate Life Cycle Fund, a maximum of 50% of your funds will be allocated to equity till you are 35 years old. After that, with every passing year, 2% of your NPS equity allocation will be shifted towards relatively less risky investment instruments like bonds, etc. Government Securities and Corporate Debt category. This Fund structure is designed to give you equal harmony from high growth and wealth preservation.

Conservative Life Cycle Fund

The design and structure of this fund allocation allow for the least risk. Here only 25% of your funds will be allocated to equity till you are 35 years old. After that, 1% of your NPS equity allocation will be shifted towards Government Securities and Corporate Debt category with every passing year. That should be your choice if you have a low-risk appetite and want to focus on preserving your savings rather than growing them well.

Active Asset Allocation

The Active asset allocation choice is ideal for you if you want maximum control to pick and choose the asset classes as well as decide the percentage of its exposure in your NPS investment. It is the most flexible strategy for you to opt if you want to take the final allocation calls, however, there are some up-side boundaries set beyond which you cannot customize your asset allocation.

  • You can allocate a maximum of 75% of funds towards Equities till you are 50 years old.
  • 51 years onwards, the maximum exposure limit of your NPS equity allocation will shrink each year by 2.5%.
  • You can allocate a maximum of 5% of funds towards Alternative Investment Funds

The liberties that Active asset allocation allows help you to achieve high returns and the inherent limitations help to contain the short-term volatility of your NPS investment towards the end of your working years.

Additional Read: Overview of Active & Auto Investment Choices

Conclusion

NPS is a great investment tool to have a reliable and plump source of income post-retirement. The asset allocation that you finally opt for is dependent on your financial goals and your risk-return profile. You have to pick an allocation strategy that will offer you the perfect balance of wealth creation and wealth preservation.

Additional Read: 5 Ways to Build a Substantial Retirement Corpus

Additional Read: How to plan for a relaxed Retirement?

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100.  PFRDA registration numbers:  POP no -05092018. We are distributors of National Pension Scheme. Please note, National Pension Scheme related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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