With the advent of nuclear families, the concept of taking care of elders in their old age has drastically declined. Also, we do not have a social security scheme that is completely funded by our government. Hence, it has become inevitable for everyone to start saving on their own for their life after retirement. There are numerous instruments in the security markets to help individuals achieve their investment goal of a secured retirement life. In addition, our government has introduced multiple schemes in order to motivate individuals for the same. One such scheme is the National Pension Scheme (NPS). The National Pension Scheme benefits the investors in multiple ways including attractive returns, tax exemption, flexibility, annuity payments, etc.

Any Indian Citizen can join this scheme either online or offline (at Point of Presence – Service Providers) with an age criterion of 18 to 65 years. This scheme offers 2 types of accounts: Tier I & Tier II. The Tier I account highly restricts investors from premature withdrawals, unless there is an absolute necessity. This account makes sure that the savings is used for the sole purpose of retirement benefits and comes with a longer lock-in period. The Tier II account is quite similar to a savings accounts, wherein one can withdraw whenever necessary. The returns from the NPS is not an interest on savings, rather it is the market generated returns from the asset classes in which the funds are allocated. The fund deposited under NPS is allocated basically in 4 different asset classes:

  • Asset Class E: Equity and related instruments
  • Asset Class C: Corporate debt and related instruments (Bonds by PSUs and Private Firms)
  • Asset Class G: Bonds issued by Central Government
  • Asset Class A: Alternative Funds

Individuals can choose to invest in 2 modes: Auto mode and Active Mode.

1. Auto Choice:

In the Auto Choice Strategy, the investors don’t need to decide on the asset allocation for investments. Rather the asset allocation for investments is made on the basis of a lifecycle-based approach. The subscriber would have a higher allocation to the equity asset class in a younger age & later when nearing to the retirement the exposure to equities will be reduced & the exposures to other fixed-income assets would be increased so as to bring more stability in the portfolio.

The subscriber needs to choose any of the 3 available investment strategies for the Auto Choice Investment option.

  • Aggressive Lifecycle Fund is the fund that is suitable for aggressive investors having a high-risk appetite. Here, high allocations of the portfolio are made in the equity asset class. The allocation limit to equity is capped at a maximum of 75% of the portfolio up to the age of 35, and later on, it would be reduced to come at 15% by the age of 55.
  • Moderate Lifecycle Fund is suitable for investors looking to invest a moderate proportion of their portfolio in the equity asset class. Here, the allocation of the portfolio to the equity asset class cannot exceed 50% up to the age of 35, and later the allocation would be reduced to 10% by the age of 55 years.
  • Conservative Lifecycle fund is suitable for investors having a low-risk appetite. Here, the allocation of the portfolio to the equity asset class cannot exceed 25% up to the age of 35, and later the allocation would be reduced to 5% by the age of 55 years.

Read More: Were You Or A Loved One Mis-Sold A Pension?

2. Active Choice:

In the Active Choice, the subscriber needs to decide the asset allocation to the various asset classes. The subscriber would choose the asset allocation proportions suitable to his risk appetite, needs & requirements. Here, The allocation of the portfolio in the Equity asset class is capped at a maximum of 75% up to the age of 50 years.  And after the age of 50 years, the allocation of the portfolio to equity will be reduced to come at 50% by the age of 60.

The following are considered as better performing schemes (Both Tiers), based on the returns they have generated:

  • LIC Pension Fund (Tier II): This is a G scheme by LIC. The investments have been consistently growing with 5-year returns at 12.21%. Although the risk factor is also pretty high, this fund has been consistent with returns as well.
  • HDFC Pension Fund (Tier I): This scheme is also based on Asset Class G. Given that the short-term returns (3 months & 6 months) outperforms its peers, the 5-year returns are also good at 10.94%.
  • SBI Pension Fund (Tier I): This a G Scheme with the highest maintained corpus in the Tier I category. The risk (standard deviation) is fairly higher, but the returns are also impressive at 10.99% (5-year).
  • ICICI Prudential Pension Fund (Tier I): This is another G Scheme with 5-year returns at 10.83%. The downside risk is comparatively lower than its peers, while the fund is also consistently growing.
  • Kotak Pension Fund (Tier I): Though this G Scheme fund has a smaller corpus, it has given decent 5-year returns at 10.95%.


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