Young investors, hike your equity exposure under NPS

Since NPS is used for a long-term goal like retirement, allowing younger investors to have higher exposure to equities will give them a chance to earn higher returns.
Priyadarshini Maji reports.
Illustration: Uttam Ghosh/Rediff.com

Pension Fund Regulatory and Development Authority Chairman Hemant Contractor recently announced that the option to invest up to 75 per cent in equities under the active choice option of the National Pension Scheme will soon become available to investors.

In NPS, investors can spread their investments across four asset classes: C (corporate debt), G (government securities), A (alternate assets) and E (equities).

NPS offers them two choices for deciding their allocation across these classes -- auto and active choice.

Under auto choice, investors can put their money in any of the three lifecycle funds -- aggressive, moderate, and conservative.

In these life cycle funds, allocation to various asset classes changes based on the subscriber's age.

In the aggressive life cycle fund, allocation to E is 75 per cent until 35 and then declines to 15 per cent by 55.

In the moderate fund, allocation to equities is 50 per cent until 35 and then declines to 10 per cent by 55.

And in the conservative fund, equity allocation is 25 per cent until 35 and then declines to 5 per cent by 55.

In active choice, the investor decides how much allocation s/he would like to have to different asset classes.

This allocation remains constant until the investor decides to change it.

Earlier, allocation to equities under the active choice option was capped at 50 per cent.

NPS already offers 75 per cent equity allocation under the auto-choice option.

It will now offer the same level of equity allocation under the active-choice option as well.

"With equity doing better than debt, there is demand even for up to 100 per cent equity exposure. We will keep reviewing our position and will weigh risk against return before taking a decision," says Contractor.

According to Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors since NPS is used for a long-term goal like retirement, allowing younger investors to have higher exposure to equities will give them a chance to earn higher returns.

It will enable their NPS portfolio returns to beat inflation meaningfully.

The higher interim volatility, according to him, does not matter since investors are unlikely to withdraw the money before 60 and hence suffer a loss.

According to Tarun Birani, founder and chief executive officer, TBNG Capital Advisors, "Equities are the only asset class that can generate higher returns if held for a long period of time. Considering the voluntary nature of the scheme, a more liberal allocation may attract more subscribers to it."

Experts suggest that as soon as the new norm is implemented, younger investors who have gone for the active choice option should consider hiking their equity allocation to 75 per cent.

However, they should look at their overall portfolio asset allocation (including mutual funds, direct equity investments, etc) and ensure that hiking equity allocation in NPS will not make their overall portfolio too risky.