Equity-Debt balancing under NPS is going to be easy for subscribers soon. The Pension Fund and Regulatory Development Authority of India (PFRDA) is planning to launch a ‘Balanced Life Cycle Fund’ for subscribers of National Pension System (NPS).
Dr. Deepak Mohanty, Chairperson, PFRDA, announced the plan to launch Balanced Life Cycle Fund under NPS during an event on May 3, 2024.
Currently, NPS offers two investment choices – ‘Active Choice’ and ‘Auto Choice’. Active choice is suitable for investors who want to actively decide their investment composition into equity, corporate debt, government securities and alternate assets as their preference.
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Auto choice is suitable for investors who don’t want to actively manage their investment portfolio. Under the auto choice, they can choose between three Life Cycle Funds where the allocation under equity and corporate debt automatically reduces with growing age of the subscriber. The auto choice allows investors to choose among moderate, conservative or aggressive investment styles based on their risk appetites.
In contrast to the currently available investment choices under NPS, the Balanced Life Cycle Fund will have higher allocation to equity (up to 50%) in younger age of contribution. The equity allocation in this fund will start reducing from the age of 45 years.
Also Read: Tax saving for AY 2024-25: Get more out of National Pension System (NPS)
“We would be launching a ‘balanced life cycle fund’ with higher allocation to equity (up to 50 percent) in the younger age of contribution and the tapering of equity would start from the age of 45 years,” Dr Mohanty said.
“This would help in maximizing the pension wealth in the longer-run while optimizing the risk and return. This product would be rolled out in a few months following system development,” he added.
The PFRDA’s plan to introduce a balanced life cycle fund under NPS is a welcome step for subscribers of the scheme. This may benefit NPS subscribers investing under the auto choice as the fund will automatically take care of equity-debt balancing with age.
For those actively managing their asset allocation, the new fund will provide a choice to leave equity-debt balancing to the NPS.
Why Reduce Equity Allocation With Age?
Investing in equity instruments contain risks as their returns are dependent on market cycles. A single crash in the market can wipe out years of accumulated wealth. Therefore, when planning for retirement, it is important to reduce allocation to equity assets and increase debt or fixed income allocation with age. This is a commonly practiced investment strategy, suggested by genuine financial advisors.
However, it may not be easy for everyone to decide how much they can allocate to equity and how much to debt as per their age and financial goals. This is where guidance of a SEBI-registered investment advisor or PFRDA-approved retirement advisor can come handy.
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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before making any investment decision.
