NPS Auto or Active Choice: How to pick the right approach EXPLAINED

NPS Auto or Active Choice: If you are investing through the National Pension System (NPS), one of the first decisions you will need to make is: auto choice or active choice? It may sound technical, but the difference is straightforward. Do you want to have your asset allocation automatically chosen for you based on your age, or do you want to do it yourself?

Before making a choice, it’s a good idea to understand how each option works.

What “Auto Choice” really means

Auto choice is the default option in the National Pension System. With this setting, your money is automatically divided among equities, corporate bonds, and government securities based on your age.

When you are younger, a greater proportion of the money is invested in equities. As you get older, the proportion gradually increases in safer debt instruments. The idea is simple: take more risks when you have more time to recover from them and less risk as you approach retirement.

Under the auto choice option, there are three lifecycle funds: aggressive, moderate, and conservative. These decide the proportion of equities in which you invest. Even the aggressive fund reduces the proportion of equities as you get older.

If you do not want to monitor the stock markets or balance the portfolio yourself, the auto choice is a hassle-free option.

What “Active Choice” offers?

The active choice is best suited for those who want to have more control over their investments. The active choice allows you to choose how much you want to invest in equities (E), corporate debt (C), government securities (G), and alternatives (A).

There are limits to investments as well. For example, investing in equities is capped at 75 per cent under the Common Scheme for private sector subscribers. The percentage gradually decreases with age.

The active choice is best suited to those who understand asset allocation and are willing to regularly review their investments.

For example, you may be able to handle market volatility and want to stick to higher investments in equities.

The active choice allows you to do that. However, with more control comes more responsibility. For example, when markets are falling, you must make an active choice on whether to stay invested.

If you are new to investing, do not follow the markets, and like to take a “set it and forget it” approach, auto choice may be a better option.

If you are already a mutual fund investor and understand equity cycles, and you wish to sync your NPS investment with the rest of your portfolio, then an active choice may be more suitable.

Temperament also plays a role in the choice between auto and active choice. Some people may be prone to panicking in a volatile market and may be tempted to constantly change their allocation with auto choice.

Others, who have more experience and wish to continue to have a larger equity allocation even in old age, may find that auto choice’s reduction in equity allocation is too conservative a strategy.

NPS Auto or Active Choice: Mistake to avoid

The biggest mistake is not making a choice at all – or picking an option and then forgetting about it.

Whichever path you choose, review your allocation at least once a year. Your risk appetite, income stability, and retirement timeline can change over time.

National Pension System allows you to switch between auto and active choice, and you can adjust your asset allocation within regulatory limits.

Remember, the goal of NPS is long-term retirement planning. The decision between auto and active choice isn’t about finding the “best” option – it’s about selecting the approach you can stick with steadily for decades.

NPS Auto or Active Choice: FAQs

1. Can I switch from auto to active choice later?

Yes. NPS lets subscribers switch between auto and active choice. Under active choice, you can also adjust your asset allocation within the allowed limits.

2. Is active choice riskier than auto choice?

It can be, depending on how you allocate your funds. Choosing a higher equity exposure increases potential volatility, while auto choice gradually lowers risk as you get older.

3. Which option gives better returns?

There’s no guaranteed winner. Returns depend on market performance and how you structure your allocation. Active choice can potentially deliver higher returns if managed well, but it also comes with greater responsibility.

(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)