PFRDA, in its circular dated November 4, 2016, added two more options of life cycle funds under Auto Choice option viz. Aggressive Life Cycle Fund and Conservative Life Fund.
These options are in addition to Existing life cycle fund (Moderate life cycle fund or LC 50), which shall still be the default fund.
Therefore, investors will have three options to choose under Auto Choice option.
Under Auto Choice option, NPS subscribers do not have to do any asset allocation on their own. Rebalancing (reallocation) among the asset classes happens done automatically on the date of birth of the subscriber.
Do note these additional options are only for Private Sector Subscribers (Subscribers under All Citizens Model). Government subscribers shall not have these two options. For Government subscribers, the equity allocation is still capped at 15%.
Aggressive Life Cycle Fund (LC 75)
Under the aggressive life cycle fund, the exposure to equity (E) is 75% upto the age of 35 and gradually goes down to 15% by the time you turn 55. Subsequently, the allocation stays the same till such time you exit NPS.
The intent of an Aggressive Life Cycle Fund is to provide young investors greater exposure to equity without the hassle of managing allocation themselves.
Conservative Life Cycle Fund (LC 25)
Under the Conservative life cycle fund, the exposure to equity (E) is 25% upto the age of 35 and gradually goes down to 5% by the time you turn 55. Subsequently, the allocation stays the same till such time you exit NPS. Clearly, Conservative Life Cycle Fund is for risk averse investors.
Points to Note
As I understand, the maximum allocation to equity under Active Choice (subscriber chooses the asset allocation) is still capped at 50%.
So, the exposure to equity can be up to 75% under Auto Choice, but it is capped at 50% under Active choice.
Sounds bizarre. Perhaps, we will have a notification from PFRDA in the near future that rectifies this anomaly.
Addition of a New Asset Class
PFRDA has added a new asset class ‘A’ for Alternative Investments for private sector subscribers. This asset class is in addition to three existing asset classes i.e. Equity (E), Corporate Bonds (C) and Government Debt (G).
Investment in Asset Class (A) shall comprise the following:
- Commercial mortgage based securities or Residential mortgage based securities
- Units issued by Real Estate Investment Trusts regulated by SEBI
- Asset backed securities regulated SEBI
- Units issued by Infrastructure Investment Trusts regulated by SEBI
- Alternative Investment Funds (AIF Category I and II) registered with SEBI
Points to Note
- Total Allocation (E + C + G + A) =100%.
- Equity exposure (E) capped at 50%. Exposure to C and G capped at 100%.
- Exposure to A capped at 5%.
- This new asset class is not available to Government subscribers.
- Available only to Private Sector subscribers (All Citizens Model)
- Asset class (A) is also not available under Auto Choice. As we discussed in the previous section, there is no allocation to Asset Class ‘A’.
- Shall be available under Active choice mode
Much ado about nothing. You can always choose Active Choice option and select equity exposure on your own.
In any case, there is no reason to invest more than Rs 50,000 in NPS per annum, if you are contributing voluntarily. If you want a higher equity exposure to equity, you can always invest in equity mutual funds.
About the additional asset class (A), I am not really sure. Yes, from diversification purposes, you can explore an additional asset class. However, I am not really verse with the pricing of this asset. Don’t think the markets for such assets are much developed in India. For now, I am not too keen on Asset class (A) but my opinion may change in the future.