Automatic or Active Investing: Which is Better for NPS?


The National Pension System (NPS) allows subscribers to invest in various asset classes such as stocks, corporate bonds and government securities via two options: active choice or automatic choice. Still, it can be difficult for subscribers to focus on the right option for them. This article will help you understand the difference between active and auto-choice options under NPS.

Active choice option: You can decide for yourself the asset allocation between stocks, bonds (government or corporate) and alternative investments. However, the maximum equity allocation is limited to only 75%. Under this option, each pension fund manager will offer a list of schemes that you can choose from according to your preferences.

Automatic choice option: The NPS automatically allocates funds and assets on behalf of subscribers if they choose this option. This allocation process uses a lifecycle-based approach to allocation. It starts by providing higher exposure in the stock portfolio when you are young and reduces stock exposure as you age and approach retirement.

This allocation approach optimizes returns and protects you against volatility and market risk.

There are three funds to choose from under an automatic allocation choice: A moderate lifecycle fund is a default option that keeps the maximum equity exposure at 50%. The Conservative Life Cycle Fund, which caps the maximum equity allocation at 25% and operates conservatively. The third is an aggressive lifecycle fund that caps maximum equity exposure at 75%.

Option active or automatic?

It can be difficult for an underwriter to choose between the options when starting to invest in the NPS.

Ajit Kumar, Chief Strategy Officer at KFintech, said, “If you don’t know which investment option to start with, the auto-allocation option can be a good choice. This option can help subscribers spread their contribution evenly across available assets. However, you should go for the NPS active choice when you gain enough knowledge and understanding of the markets and the system and have the confidence to manage your portfolio independently.”

Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors, explained, “Subscribers should consider looking at three factors if they want active choice. The first factor is the ability to make decisions on asset allocation choices based on the valuations of different asset classes or access to investment advice. The second relates to investors’ asset allocations elsewhere through other platforms, as the NPS would only be a subset of the investor’s overall portfolio. For example, if the investor has a heavily leveraged portfolio elsewhere, they may choose to have more stocks in the NPS and therefore not want an automatic option. Third, it takes time to review the NPS portfolio on an ongoing basis to make active choices and change if necessary.”

“Fundamentally, to make an active allocation choice, you will need to be a knowledgeable and practical investor who tracks all relevant market dynamics on your own. With this domain expertise, you can fully control your NPS investments,” added Amol Joshi, Founder of Plan Rupee Investment Services.

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