The primary reason is that the National Pension System (NPS) is a long-term, retirement saving product. If somebody joins it at the age of, say, 25 years, he will have a good 35 years before he withdraws the money. A higher allocation to equity in such a portfolio can potentially fetch higher returns. The interim volatility does not matter, since the investor is not likely to withdraw the money until 60.
NPS already offered 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 (up from 50 per cent earlier).
What should investors do?
At present, the PFRDA board has approved the proposal. As soon as it is notified, younger investors who have opted for the active choice option should hike their allocation to equities up to 75 per cent, assuming they have the requisite risk appetite.