The first is a default auto choice option and is for those who find it tough to decide to make investments. The second is an active choice option and is for those who wish to take control of their investments themselves
NPS or National Pension System offers two choices to make investments in four asset classes –equities, government securities, corporate debt and alternative investment funds (AIFs).
One is a default auto choice option and is for those who find it tough to decide to make investments. The other is an active choice option and is for those who wish to take control of their investments themselves.
Let us understand the investment choices available under NPS and how they work.
Active choice
In the case of investing in NPS, you get the flexibility to design your own portfolio. Depending on your risk appetite, you can build your portfolio by allocating funds amongst the available four asset classes.
Normally, in this type of investment choice, you have the right to actively decide as to how much you wish to invest, based on personal preference. You have to choose the pension fund manager (PFM), asset class as well as percentage allocation to be done in each scheme of the PFM.
Auto choice
At times, building your portfolio can be a time-consuming process. In such cases, NPS gives you the flexibility to opt for a dynamic and automatic allocation of your portfolio in case you do not want to use the active choice option. This is known as auto choice.
In auto choice, your money will be invested in asset classes in defined proportions based on your age. As an individual’s age increases, exposure to equity and corporate debt gets gradually reduces while in government securities it increases.
This way, depending upon the risk appetite of the subscriber, there are three different options available under the auto choice option. These are aggressive, moderate and conservative.
At the age of 35, in the aggressive option, the maximum equity exposure is 75%. In the moderate option, the maximum equity exposure is 50% and in the conservative option, the maximum equity exposure is 25%.
Thus, a subscriber who wants to automatically reduce exposure to more risky investment options can use the auto choice option.
