NPS: Understanding Difference Between NPS Auto and Active Choice

The National Pension Scheme (NPS) is a voluntary, long-term retirement plan regulated by the central government and the Pension Fund Regulatory and Development Authority (PFRDA). It allows investors to build a substantial pension corpus by contributing to asset classes across equity, government bonds, corporate bonds, and alternative investment funds (AIFs).

NPS is a lucrative investment avenue as it offers higher returns than traditional low-risk investments like FDs and PPFs. Moreover, NPS contributions up to Rs. 50,000 qualify for tax benefits under sections 80C and 80CCD.

However, when investing in NPS, you must select between two investment options - Auto and Active. These options determine the ratio of your allocations in different asset classes. In this article, we'll explain all about NPS, auto or active, and which is better.

What is an auto choice in NPS?

The auto choice in NPS allocates a pre-defined ratio to the three asset classes that change with time. It is ideal for investors who lack the expertise to manage their NPS investments. This investment option has three sub-categories:

1. Aggressive auto choice (LC75): This option allocates a maximum of 75% of investments in equity up to the age of 35. After 35, the allocation reduces by 4% every year.
2. Moderate auto choice (LC50): This option allocates a maximum of 50% of investments in equity up to the age of 35, and the remaining 50% is invested in government and corporate bonds.
3. Conservative auto choice (LC25): This option is ideal for risk-averse investors. It invests a maximum of 25% of investments in equity up to age 35. After 35, the allocation reduces every year.

What is an Active Choice in NPS?

Active Choice in NPS allows investors to choose how their NPS contributions are allocated across different asset classes. Under this option, you can actively choose the percentage of your investment to be distributed among equity, corporate bonds, government securities, and alternative assets, depending on your risk appetite and financial goals.

You can select from the following four asset classes to invest in NPS:

• Equity (E): Refers to stock market investments (up to 75% for most investors)
• Corporate Debt (C): Investments in government bonds such as Public Infrastructure Institutions (PFIs), infrastructure companies, and money market instruments.
• Government Securities (G): Investments in government securities and bonds issued by state and central governments.
• Alternative Investment Funds (A): Investments in funds, such as REITS, MBS, and CMBS. 

Factors to Consider Before Switching

Before switching between the active choice in NPS and NPS auto choice, weigh the associated factors. Each option offers a distinct approach to asset allocation, and your final decision should align with your financial goals and risk appetite:

1. Investment Knowledge and Experience: Switching from auto choice to active choice requires a sound understanding of financial markets and asset classes. You’ll be responsible for deciding how to allocate your contributions across these classes. If you're confident in your ability to manage risk and optimise returns through active allocation, only then should you consider making the switch.
2. Trust in Portfolio Management: If you're considering NPS active vs auto and moving to auto choice, you’re essentially handing over control to the NPS fund manager. This means it’s important to evaluate the track record of the fund manager.
3. Applicable Charges: While it is possible to switch, there may be administrative charges or limitations on how often you can make the switch in a financial year. Before proceeding, review the applicable fees, terms, and guidelines set by the Pension Fund Regulatory and Development Authority (PFRDA).

NPS Auto or Active - Which is Better?

Both auto and active choices in NPS cater to different investment styles and risk appetites. Here are the key contrasting factors:

Both active choice and auto choice in NPS are designed for different types of investors. If you're confident in managing asset allocation and want full control over your portfolio, pick the active choice option.

On the other hand, NPS auto choice is better for those who prefer a guided approach, where a professional fund manager adjusts the allocation based on age and risk profile. 

Conclusion

After understanding the difference between active and auto choice in NPS, it’s important to select the one that aligns with your financial goals, risk appetite, and investment knowledge. Once you've made your choice, regular review is equally important. If your selected option isn't yielding the expected results, you can switch investment options in NPS auto or active.

Visit Tata Capital Moneyfy's official website to start your NPS investment journey today.