The equity kicker for NPS

The pension fund regulator has increased the threshold for investing in equity

The National Pension System (NPS) continues to increase the proportion that subscribers can invest in equity, with the Pension Fund Regulatory and Development Authority (PFRDA) steeply increasing the threshold.

Apart from allowing higher equity exposure, the regulator is now set to permit investments in debt instruments with relatively lower ratings, subject to a certain limit.

The change is applicable only to the all-citizens model and not for government employees.

The PFRDA has also relaxed a few withdrawal norms for taking out money from your NPS investments.

From the present limit of 50 per cent, ‘active choice’ customers can now invest up to 75 per cent of their NPS instalments in equity. The ‘auto choice’ option already has this option.

Raising equity threshold

Allowing a new higher threshold would be a welcome move for young investors who have just started working or are in the early years of their careers.

Ideally, asset allocation should be based on age, time horizon for goals and risk appetite.

So, in keeping with these factors, higher equity investments would work to deliver above-average returns over the long term. The new 75 per cent allocation would end up making your portfolio resemble an equity-oriented balanced fund with moderate risks. The equity portion of pension fund managers has garnered annual returns of 13-15 per cent over the past five years.

For younger investors (25-35 age group), this change would be welcome. They should use the opportunity to up their equity exposure.

Upping bond risks

The PFRDA has also recommended investing in lower-rated debt instruments. In the corporate debt portion, fund managers are currently allowed to invest only in higher-rated instruments — AAA and AA.

They will now be allowed to invest in A-rated bonds as well. These investments are restricted to 10 per cent of the overall corporate bond portfolio.

Although risks would increase by going down the rating curve, yields are expected to be better, and would perk up overall returns.

This move would also signal a small start to the much-called-for deepening of the domestic corporate debt market.

Withdrawal norms, too, have been eased. You can now withdraw a portion of your accumulated corpus for acquiring new technical skills (going for higher education, etc) as well as starting a business.

The PFRDA introduced the withdrawal option in 2015, allowing subscribers to take out up to 25 per cent of their corpus, for a few specified purposes, if they had invested continuously for 10 years.

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