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?

The active choice allows investors to manage their NPS allocations in different asset classes actively. They can make this decision based on their preferences and risk appetite. However, they cannot invest more than 75% of their portfolio in equity for up to 50 years, after which equity investments must reduce by 2.5% every year. Moreover, investors cannot allocate more than 5% of their investments to AIFs.

Under active choice, you can select your preferred Pension Fund Manager (PFM), asset class, and percentage allocation. You can select from the following four asset classes to invest in NPS:

NPS auto or active: Which is better?

Both auto and active choices in NPS cater to different investment styles and risk appetites. If you don't have the expertise to manage your NPS investments and have a low-risk appetite, the auto choice will be ideal.

However, the active choice will be more suitable if you want more control over asset allocations and are willing to take a higher risk.

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