With higher equity cap in NPS, young investors should increase exposure

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The Pension Fund Regulatory and Development Authority (PFRDA) 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 (NPS) will become available to investors by the end of this month. 

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.

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.