Introducing balanced lifecycle funds: Enhancing NPS investment options

New Delhi: National Pension Scheme (NPS) investors are set to gain access to a wider array of investment options with the upcoming launch of Balanced Lifecycle Funds by the Pension Fund Regulatory and Development Authority (PFRDA). This initiative aims to provide investors with increased flexibility in equity investments over an extended period.

What exactly is the Balanced Lifecycle Fund and how does it function?

This fund divides investments equally between equity and debt until the investor reaches the age of 45. Subsequently, the allocation shifts annually, reducing exposure to equity while increasing the share of debt investments.

The introduction of this new fund is poised to benefit investors significantly. To grasp its implications, it’s essential to first understand the current structure of NPS. Currently, investors have two primary options: Auto Choice and Active Choice.

Under Auto Choice, investments are automatically allocated between equity and debt based on the investor’s age. This includes three sub-options: LC 75 (Aggressive Lifecycle Fund), LC 50 (Moderate Lifecycle Fund), and LC 25 (Conservative Lifecycle Fund). The Aggressive Lifecycle Fund, for instance, directs approximately 75% of investments into equity until the investor reaches 35 years of age. As age progresses beyond this point, equity exposure decreases, stabilizing at 15% by age 55.

Moderate Lifecycle Fund, currently the default under Auto Choice, equally divides investments between equity and debt until the age of 35, with equity exposure tapering to 10% by age 55. Conversely, Conservative Lifecycle Fund starts with a 25% equity allocation, gradually decreasing to 5% by age 55 as age-related risk management becomes a priority.

Active Choice grants investors complete autonomy over their equity and debt allocations, allowing them to tailor their investment strategy according to personal preferences and risk appetite.

Historically, equity investments have demonstrated stronger long-term returns, prompting PFRDA’s move to introduce the Balanced Lifecycle Fund. This fund will maintain a 50-50 equity-debt split until the investor reaches 45 years of age, after which equity exposure will gradually decrease while debt allocation increases. This adjustment aims to strike a balance between risk and returns, thereby bolstering the growth of retirement funds.

Previously, NPS offered equal equity-debt investment options only until the age of 35. The extension of equity exposure up to age 45 under the Balanced Lifecycle Fund represents a significant opportunity for investors to accumulate greater wealth over an additional decade.

Financial expert Jitendra Solanki highlights the advantages of the Auto Choice option within NPS, particularly for investors who may find it challenging to navigate the complexities of equity and debt allocation. With the Balanced Lifecycle Fund, investors benefit from an extended period of higher equity exposure before gradually transitioning to a more conservative portfolio approach as they near retirement age.

Both current and new NPS investors will have the option to select the Balanced Lifecycle Fund, pending its potential inclusion as the default choice under Auto Choice. This development is expected to enhance investment returns for NPS participants, marking a positive step forward in retirement planning strategies. rephrase with headlines and sub headlines