Why invest in NPS?
Apart from tax benefits, NPS also offers the flexibility to choose between two investment options – Active Choice and Auto Choicе. In NPS Activе Choicе, thе subscriber can dеcidе thе allocation of funds across assеt classеs (Equity, Corporate Debt, Government securities, and Alternative Investment Funds) based on his risk appеtitе.
On the other hand, in NPS Auto Choicе, thе funds are automatically allocated based on thе agе of thе subscribеr, with a highеr еquity allocation for youngеr individuals and a gradual shift towards safеr instruments as thе subscribеr nеars retirement agе.
Furthеr, on maturity, thе subscribеr can withdraw up to 60% of thе accumulatеd corpus as a lump sum, while the remaining 40% is mandatorily usеd to purchasе an annuity. This annuity providеs rеgular incomе during thе subscribеr’s retirement years.
| Feature | Active Choice | Auto Choice |
| Who it’s for | Investors with a good understanding of asset allocation and who want to manage investments based on market conditions. | Investors who prefer a more hands-off approach, where the investment automatically adjusts based on age and risk profile. |
| Flexibility | In active choice one can make an asset mix among asset classes viz. equity, corporate bond and government securities with appropriate proportion depending upon one’s risk appetite; one can invest upto 75 percent in equity. | In auto choice, one gets to select any one of the life cycle funds out of four viz. LC25, LC 50, LC 75 and recently launched balance life cycle fund (BLC). |
| Pros | – Full control over investment strategy. – Potential for higher returns with equity exposure. |
– Risk-appropriate auto adjustments as per age. – Simple for investors who want to avoid making allocation decisions. |
| Risk Tolerance | Subscribers must be comfortable making investment decisions and managing market risks. | Aggressive: Suitable for higher risk tolerance. Moderate: Balanced risk tolerance. Conservative: Suitable for low-risk tolerance and focuses on stable returns as retirement approaches. |
| Who Should Choose | Those who want to actively manage their portfolio and have a higher understanding of market risks and opportunities. | Those who want automatic, age-based allocation without the need to constantly manage their investment strategy. |
| Risk Appetite | Active choice offers more control and higher equity exposure | Auto choice offers less control and equity exposure balances as per age |
Conclusion:
Choosing between NPS Active Choice & NPS Auto choice essentially boils down to how much time and knowledge you have about investments and how much risk you are willing to take. Active Choice offers the potential for comparatively higher returns through personalized asset allocation in NPS, while Auto Choice offers ease and peace of mind with automatic rebalancing. Evaluate your personal financial situation carefully, consider consulting with a financial advisor, and choose an option that best aligns with your retirement goals and investment style, ensuring you stay on track for a financially secure retirement.
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