One is an Aggressive Life Cycle Fund, allowing equity allocation up to 75 per cent till the age of 35 years. The other is a Conservative Life Cycle Fund, allowing equity allocation of up to 25 per cent till the age of 35 years. This is in addition to the existing fund under the auto-choice option, offering equity exposure up to 50 per cent (to be now called the Moderate Life Cycle Fund) till the age of 35.
With the aggressive fund, PFRDA has addressed investors with a higher risk appetite. “This will help attract young, educated investors to NPS. It has been difficult to attract such investors because they found the 50 per cent cap on equity investment restrictive,” says Sumit Shukla, chief executive officer, HDFC Pension Management.
He suggests most young people should go for the 75 per cent equity option if they wish to combat inflation effectively and accumulate a corpus for allowing them to retire comfortably.
While this fund will have higher volatility, young investors should not worry overly about this. One, the investment guidelines for pension fund managers permit them to invest only in stocks that are within the futures & options segment and with market capitalisation of at least Rs 5,000 crore. “The guidelines allow us to choose from only best-in-class equities,” says Shukla.
Beside, the 25-year or higher investment horizon is sufficient for these funds to recover from any market downturn. “Since investors are not going to touch this money for a long time, they can truly realise the benefit of this higher-risk, higher-reward option,” says Arnav Pandya, a Mumbai-based financial planner.
The Conservative Life Cycle Fund is meant to attract risk-averse investors who have never ventured into equities but would now like to test the waters with a small exposure. An Alternative Investment Fund, to which investors may have exposure of up to five per cent, has also been launched.
The exposure is too little and the products the fund will invest in are complicated, so you may ignore this fund for the moment.
Experts feel the 75 per cent equity limit should also be extended to the active-choice option. “Here, you have the more knowledgeable investors. They deserve to be allowed a higher equity exposure,” says Shukla.
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“Between 35 and 45, you earn and save more. You want your money to be invested aggressively in these years. Cutting equity exposure from 35 reduces your chances of ending up with a comfortable corpus,” says Pandya.
NPS suffers from other lacunae. While Public Provident Fund and equity mutual funds (one year-plus investment) don’t get taxed at withdrawal, only 40 per cent of the NPS corpus is tax-free. Also, according to Hemant Rustagi, chief executive, Wiseinvest Advisors, “The compulsory annuitisation of 40 per cent of the corpus results in low returns after retirement.”
Experts suggest the regulator explore options such as allowing people to stay invested in NPS and drawing a regular pension via a Systematic Withdrawal Plan.