Yes. You heard it right. A private sector NPS subscriber can now invest up to 75% in equity. But it comes with a disclaimer. Let us get into some finer details. The NPS was made available to all citizens of India from May 01, 2009. For many years, there was a limit to the allocation towards equity. The maximum allocation allowed to equity was capped at 50%.
For someone not familiar with the fund types under NPS, an investor has 2 choices for investment when he/she chooses to invest under NPS – Auto Choice or Active Choice. An auto choice is more suitable for investors who do not have the required knowledge to manage their NPS investment or who want to put their investments on an auto mode. Under this choice, the investor’s allocation towards riskier investment like equity and corporate debt goes on decreasing as he gets older. The maximum exposure to equity under this was 50% till the subscriber reached 35 years of age and then it went on reducing till he/she reached 55 years.
The other choice is Active Choice where the subscriber has the right to actively decide the asset allocation that he/she wants based on personal preference. The maximum exposure to equity was 50%.
Changes introduced by PFRDA
In Nov 2016, PFRDA introduced an aggressive fund which allowed an investor below the age of 35 years to take up to 75% exposure in equity. This was appropriate for young investors who had time on their hand to take more risk. However, post 35 years, the equity allocation of 75% will get reduced systematically each year. By the time the client reaches 55 years, the equity exposure he/she has under equity will be brought down to 15%. There was no change to the max cap of 50% for the Active Choice.
PFRDA has brought in a lot of changes over the years and there is one more change that they have introduced recently. From Aug 31, 2018, the subscriber can invest up to 75% in equity under the Active Choice. This is great news for many investors who want a higher equity exposure to build their retirement corpus. In this case, the subscriber can choose to have 75% equity exposure till 50 years. Post that it reduces as per a matrix until it reaches 50% at the age of 60. (A reduction of 2.5% each year)
NPS already has the extra tax exemption of Rs 50,000 over and above the 80 C limit. Now, with the increase in equity cap for active funds, they are giving one more reason why many investors should consider investing in NPS. For investors who are prepared to stay invested for the longer horizon, equity has been known to give superior returns over the other asset classes. However, PFRDA has ensured that for the active choice also, the equity allocation is reduced beyond 50 years of age to ensure that a more conservative asset allocation.
An investor should look at investing in NPS basis his risk appetite, liquidity needs and his overall asset allocation considering his investments in other products.
Sudipto Roy was heading Treasury function for Tata SSL and has an extensive experience of the Indian financial markets with a career spanning over 27 years he has worked in diverse industries such as Financial Planning & Distribution, Asset Management, Life Insurance, Insurance Broking, Equity etc. He has held a leadership position in PNB Principal Financial Planners, Kotak Mahindra Mutual Life Insurance, Birla Sun Life Insurance, and Kotak Securities.