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How should one decide on fund allocation within NPS?

It is very important to understand and strategically allocate your NPS funds in diverse investments and schemes for a cash-rich retirement with minimal risk.

  • 2,860 Views | Updated on: May 22, 2024

The importance of saving for the future cannot be emphasized enough. It becomes a basic need, especially for people working in industries where there is no pension system in place. The way you study in a dedicated manner in school so that you can be in your dream college? - having a savings plan for your post-retirement life and growth is something similar to that. These savings plan or scheme in which you can invest are known as pension schemes.

The National Pension Scheme or NPS is one such savings/investment plan offered by the government and is open to both government and non-government employees. It is for everyone who is a citizen of India—whether they reside in or out of India. This scheme has been very popular in India and if you are looking at making investments towards your future, this scheme is definitely a good option. Let us look at some of the possible ways you can invest in the National Pension Scheme and how you can make the most of it.

Types of accounts

There are typically two types of accounts that you can open under NPS: A Tier 1 account and a Tier 2 account. The former is a savings-oriented account and it is a primary requirement for opening an NPS account. Tax exemptions under Section 80C and 80CCD of the Income Tax Act of 1961 are valid here. There are a few withdrawal conditions that you will have to follow which means that you cannot withdraw your amount until the age of 60 except under conditions such as a family emergency, medical requirements, etc. Even post 60, you can take 60% of your total savings as lump sum, while the rest 40% have to be invested in equity.

A Tier 2 account, though an NPS account, is quite the opposite. Here, you can withdraw your amount as and when you want and there are no tax benefits. Additionally, in order to have a Tier 2 account, you need a Tier 1 account

Getting to Know the Investment Type

There are a number of investment options that are offered to you under the National Pension Scheme which include, equity, government security, corporate debt, alternate investment funds (AIF), etc.

Equity

These are high-risk allocations since they are directly invested in the share market. However, they also provide high returns

Government security

It is a relatively low-risk investment option and also has low returns. Here the money is invested in the bonds issued by the government.

Corporate debt

The money invested is in bonds that have been issued by Public Sector Units.

Alternate Investment Funds (AIF)

Here money may be invested in Real Estate trusts.

Along with these options, there are two other choices that you can make. They are known as:

  • Active choice
  • Auto choice

As the name suggests, active choice allows you to make the decision of which sector you want to make the investment in out of the four mentioned above. The limitations here are that you can invest 75% into equity up to the age of 50 and 5% into AIF. If you are willing to take risks with your investment, then these options are suited for you. However, if you wish to be more conservative when it comes to your investment, you can choose Government Security or Corporate Debt.

On the other hand, in auto choice, you do not need to make any allocations yourself. Here you will be given three options out of which you can simply choose one and the rest is taken care of. The options are as follows:

  • Aggressive life cycle funds
  • Moderate life cycle funds
  • Conservative Life cycle fund

Choosing the ideal asset allocation is important to your pension plan. It is therefore a good start to read and investigate all the options before making a choice. This will ultimately determine your savings in the future and enable you to live your post-retirement dream life!

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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