Investing to create a retirement corpus is one of the key financial goals of investors. Among numerous investing options such as mutual funds and ULIPs, investing in the National Pension System (NPS) is considered a feasible alternative too.

Contrary to a widely-held perception, NPS contributions are open to corporate employees as well. When you invest in the NPS, you can get exposure to four different asset classes: equity, corporate bonds, government bonds and alternative investment funds (AIFs).

Besides, the retirees can opt for any of the 10 pension fund managers based on their credibility and their past returns, among other factors.

However, one of the key reasons that determine the performance of your NPS investment is the proportion in which you invest in these asset classes.

For the unversed, investors have two options to determine their allocation in asset classes. First, opt for a pre-decided pattern or second, choose the ratio on their own. The former method is known as ‘auto’ choice, while the latter is ‘active’ choice.

Let us understand more on the nuances of these two NPS options:

1. Auto choice: This is essentially meant for the investors who want to cut down their allocation to equity with advancing age. The proportion in three asset classes will be determined in a pre-defined ratio that changes with an increase in age.

There are three sub-categories within the category of auto choice.

Aggressive auto choice: In this the maximum allocation to equity can be 75 percent of total assets till the age of 35. Then it reduces by 4 percent with every passing year i.e., 71 percent at 36, 67 percent at the age of 37, so on and so forth.

Moderate auto choice: In the moderate lifecycle fund, the maximum allocation to equity is 50 percent till the age of 35, and the remaining in corporate and government bonds. This allocation to equity declines with each passing year.

Conservative auto choice: In this choice, investors can opt for the maximum allocation of 25 percent till the age of 35 and it reduces further by 1 percent with each passing year.

2. Active choice: In this, investors can decide on their own as to how their contribution is to be invested on the basis of their personal choices and preferences and other factors such as risk appetite.

But there are certain thresholds that need to be adhered to. For instance, up to the age of 50, equity allocation can not be more than 75 percent, which reduces by 2.5 percent with every passing year. Additionally, allocation to alternative investment funds can not be more than 5 percent. And naturally, total allocation across equity, corporate bonds, government bonds and AIF should amount to 100 percent.

Factors that affect your choice:

Risk appetite: When you have a risk appetite then you are advised to opt for active choice so that you can make the most of a bull run instead of being tied to the pre-decided ratio given in the auto choice.

Alternatively, when your risk appetite is low, you choose the low, moderate or high risk options within the auto choice.

Knowledge of markets: When your knowledge of markets is high, and have some time to do research also at your disposal, then you can take the investing decision and go for the active choice of investing, instead of relying only on the auto choice.

Engaging an investment advisor: If you have an elaborate portfolio with investment across instruments and have also engaged an investment advisor for these decisions, then it may be advisable for you to opt for the active choice where you – along with your investment advisor – take the decision of choosing your allocation to different asset classes.

On the contrary when you are a busy salaried employee and have not engaged a wealth advisor then it may be better to go for the auto choice so that the decision of deciding the allocation is taken on an auto pilot mode.

Source By: livemint

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