NPS: You can choose 100% equity exposure based on risk appetite, timeline

Investors must educate themselves and become more financially savvy to optimise the benefits of greater choice

 On October 1, observed as NPS Diwas, the Pension Fund Regulatory and Development Authority (PFRDA) launched the Multiple Scheme Framework (MSF). It enables non-government sector subscribers of the National Pension System (NPS) to hold multiple schemes under a single permanent retirement account number (PRAN) across different central record-keeping agencies (CRAs). 

More choice 

Earlier, NPS investors could allocate money in Tier -I (retirement) and Tier-II (savings) accounts across equity (E), corporate bonds (C),  government securities (G), and alternate investments (A), through either the active choice (self-managed) or auto choice (age-based) asset allocation options. 

With MSF, subscribers can invest in multiple schemes managed by different fund managers. “Pension fund managers (PFMs) can now offer new fund options beyond the existing E, G, C, and A schemes,” says Kurian Jose, chief executive officer (CEO), Tata Pension Management. 

Each scheme must offer at least two variants: high-risk and moderate. The high-risk option can now have 100 per cent equity exposure, up from the earlier 75 per cent limit. “This creates the possibility of higher returns over the long term, especially for young investors,” says Ranjit Jha, managing director & CEO, Rurash Financials. PFMs may also launch a low-risk variant. MSF is expected to encourage diversification by enabling investment across fund managers and different asset mixes. “Subscribers can choose schemes based on their risk appetite. They can mix high-risk and moderate-risk schemes within the same PRAN,” says Ranbheer Singh Dhariwal, group head – social security & welfare, Protean eGov Technologies. 

“MSF makes NPS more flexible and similar to mutual funds while retaining its tax benefits,” says Charu Pahuja, certified financial planner, director & chief operating officer, Wise Finserv. 

Volatility could rise 

Experts caution that excessive choice could complicate what was meant to be a simple retirement product. “More choices could increase complexity for investors,” says Deepesh Raghaw, a Sebi-registered investment advisor. Those lacking financial expertise or advice could make unsuitable decisions. 

Managing multiple schemes would also mean more monitoring and tracking. Over-diversification could dilute returns. With 100 per cent equity exposure now possible, volatility is likely to increase. 

Investors cannot switch between MSF schemes within tier I before completing 15 years or at exit (60 years or retirement). “The mandatory 15-year lock-in is highly restrictive,” says Jha. 

“During unfavourable market movements, investors won’t have the flexibility to rebalance into debt until they complete the mandatory 15-year vesting period,” says Prakhar Patidar, financial advisor and founder, Infinity Wealth Advisor. 

“If the stock market falls when someone is close to retirement, their savings would take a big hit. This is the single biggest risk with full equity exposure,” says Pahuja. 

Investors may shift from MSF to common schemes (under auto and active choice) during the 15-year vesting period. “What is not clear is whether they can move from common schemes back to another MSF within these 15 years,” says Raghaw.

NPS’s low-cost structure has long been its attraction. But under MSF, the annual fund management charge will rise to 0.30 per cent. “Higher fees can reduce the compounding benefit over decades,” says Pahuja. 

Who should opt for MSF? 

Younger subscribers with long horizons may benefit most. “Those who have long retirement horizons of 15–20 years and seek higher long-term returns may opt for MSF,” says Dhariwal. 

Pahuja adds that such investors must be able to withstand market volatility. Jose says those seeking diversification across fund managers and investment styles may also consider it. 

Jha cautions that investors nearing retirement (under 10 years) or those with low risk tolerance should stay away. Pahuja advises that subscribers who may need funds soon for health or family reasons should avoid MSF. Those uncomfortable with managing multiple schemes should also stay away. 

Exercise caution 

The 15-year vesting period is meant to encourage long-term discipline but restricts liquidity. Patidar advises investors to maintain adequate liquid and short-term assets. Pahuja says they should understand the lock-in and switching rules before investing. 

Jose warns against over-diversification and suggests limiting investments to two or three schemes. “Don’t pick schemes with similar mandates as doing so will not improve returns,” he says.  

The choice of schemes should depend on risk appetite and investment horizon. 

Pre-retirees should make use of the provision that allows shifting from MSF to common schemes during the vesting period. “In future, those approaching retirement whose 15-year vesting period is not over can use this option to reduce equity exposure,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com. 

 

 

Lower annuitisation from  40% to 20%: Sound move? 

PFRDA has proposed reducing annuitisation for non-govt subscribers. Rajani Tandale, senior VP, Mutual Fund, 1 Finance, assesses its pros and cons 

Pros

• Enhanced flexibility
• Larger corpus stays market-linked, allowing phased withdrawals

Cons

• Longevity, market and sequence risk shift to retirees
• Increased behavioural risks- overspending, panic switching
• Lower steady income from annuities
• Lump-sum withdrawal corpus above 60% may not be tax-exempt