NPS Investment Options: Auto Choice vs. Active Choice Explained

The National Pension System (NPS) is a government-backed savings plan that lets subscribers build a corpus and receive a monthly pension after retirement. Subscribers can open an NPS account and contribute regularly to build wealth and grow it over time with compounding interest.

NPS is one of the most suitable retirement savings plans, offering auto and active investment options. Since both are suitable for different retirement goals and liquidity requirements, choosing an appropriate NPS investment option is essential. The approach to asset allocation optimises returns and protects against market risks and volatility.

The following sections will explain the two pension fund investment choices and help you decide whether the NPS auto or active option is better.

NPS Investment Option

There are two primary NPS investment options: Auto Choice and Active Choice. In the NPS auto choice, the fund manager automatically allocates the funds according to the subscriber’s age, investment horizon, goals, and other factors. However, the NPS active choice allows subscribers to choose their asset allocation voluntarily.

What is Active Choice in NPS?

The active choice in NPS allows subscribers to decide their asset allocation across equity, bonds, and alternative investments. However, the maximum equity allocation in an NPS active choice is limited to 75% up to 50 years of age. It reduces by 2.5% with each passing year. Additionally, asset allocation to alternative investments should be at most 5%. Fund managers offer a list of schemes that subscribers can choose according to their preferences.

What is Auto Choice in NPS?

In the NPS auto choice, fund managers allocate assets and funds on the subscriber's behalf. It begins with higher exposure to equity at a young age and reduces the allocation as the subscriber ages and approaches retirement.

The NPS auto choice has three sub-categories:

NPS Aggressive Auto Choice: In the NPS aggressive auto choice, the maximum equity allocation is 75% of total assets until 35 years of age. Gradually, it reduces by 4% each year, which means 71% at 36, 67% at 37, and so on.
NPS Moderate Auto Choice: In moderate auto choice, the maximum equity is 50% until 35 years of age. It then decreases by 2% each year, which means 48% at 36, 46% at 37, and so on. The remaining funds are invested in government and corporate bonds.
NPS Conservative Auto Choice: In the conservative auto choice in NPS, subscribers can allocate up to 25% to equity until 35 years of age. This allocation reduces by 1% each year, meaning 24% at 36, 23% at 37, and so on. The remaining funds are invested in less volatile instruments like government and corporate bonds.

Factors to Consider Before Switching

Here are a few factors one must consider before switching between NPS auto choice and active choice:

Investment Knowledge and Experience: An investor must switch from auto to active choice in NPS only if they can efficiently handle the asset allocation.
Portfolio Manager: When switching from active to auto choice in NPS, they must research the portfolio manager's reputation in delivering returns.
Applicable Charges: Check the applicable charges to switch between NPS auto and active choices.

NPS Auto or Active, Which is Better?

Here is a detailed comparison between auto and active choices in NPS:

Parameter	NPS Active Choice	NPS Auto Choice
Account Management	The subscriber actively manages the account and allocates funds to assets based on their investment knowledge and experience.	The subscriber appoints a fund manager to allocate funds to the most appropriate assets.
Suitability	The active choice in the NPS option is more suitable for investors who wish to manage their asset allocation actively.	The auto choice in NPS is more suitable for inexperienced investors who want to leave the job of asset allocation to experts.

Those who are unsure whether NPS auto or active is better must consider various factors when choosing between the two. These include their risk appetite, market knowledge, investment experience, and the need for an investment advisor.

Conclusion

After understanding the difference between active and auto choice in NPS, you must choose one according to your financial goals, investment knowledge, risk appetite, and other factors. After finalising the NPS investment option, reviewing and adjusting the choice is also essential. If the choice does not deliver the desired returns, the pension fund investment plan also gives the option to switch the plan once a year.

Frequently Asked Questions (FAQs)

Q : Which option is best for NPS?

The best option depends on the subscriber’s market awareness, financial goals and risk appetite.

Q : Is aggressive auto choice good in NPS?

NPS's aggressive auto choice is a good choice, as it allocates more funds into equity when the subscriber is young and can take more risk with their funds. However, the risk reduces with the subscriber's age as they approach retirement, and their risk appetite diminishes.

Q : How to change from auto choice to active choice in NPS?

An investor may change from auto choice to active choice in NPS by logging in to their NPS account and changing their scheme preference.

Q : How does the active choice work?

The active choice in NPS gives subscribers the freedom to choose their investment assets based on their financial goals and risk appetite.

Q : Which is better: active choice or auto choice in NPS?

The final choice depends on the investor’s market knowledge and confidence. If they are sure they can allocate their funds better than the fund manager, the active choice is more suitable. However, beginners can opt for the NPS auto choice to leave asset allocation to experts.

Q : How does the auto-choice work?

In the NPS auto choice, fund managers use their market knowledge and experience to allocate funds to appropriate assets based on the subscriber's age, risk appetite, investment goals, and other factors.

NPS Investment Options: A Guide to Auto Choice and Active Choice