Choosing the Right NPS Scheme: Active, Auto, or Multi Scheme Framework

The National Pension System (NPS) is a government-backed retirement savings initiative designed to help individuals build a substantial retirement corpus. It offers flexibility in investment choices and tax benefits, making it an attractive option for retirement planning.

What Schemes does the NPS provide?

The NPS offers two primary schemes: the Common Scheme and the Multi Scheme Framework (MSF).

The Common Scheme allows investors to choose between Active and Auto choice for asset allocation, focusing on individual asset selection. In the Active Choice, investors have the flexibility to decide the percentage allocation in different asset classes such as equity, corporate bonds, and government securities, up to a maximum of 75% in equity (PFRDA guidelines). This option is suitable for those who prefer to have control over their asset allocation. On the other hand, the Auto Choice offers a lifecycle fund approach, where the allocation among asset classes is automatically adjusted based on the subscriber's age, reducing equity exposure as retirement approaches. This is ideal for investors who prefer a more structured and age-appropriate investment strategy.

The Multi-scheme Framework (MSF) is the new scheme of NPS that enables broader diversification, including up to 100% equity exposure, which can potentially yield higher returns but also involves higher risk. The MSF is designed for those who prefer a more hands-off approach, relying on fund managers to make investment decisions.. It also allows you to make a combination of different pension fund managers (similar to a mutual fund) with different equity exposures (it is advised to have a combination of up to 3 pension fund managers to take the advantage of compounding).

How are Schemes Chosen in the Multi Scheme Framework?

In the Multi Scheme Framework, schemes are chosen based on the risk exposure and their scheme disclosure documents. Subscribers can select from a variety of schemes offered by different pension fund managers, each with distinct risk profiles and investment strategies. The scheme disclosure documents provide detailed information about the investment objectives, asset allocation, and risk factors associated with each scheme, helping subscribers make informed decisions.

Subscribers can diversify their investments by choosing schemes with varying equity exposures, aligning with their risk tolerance and financial goals. This framework allows for a tailored investment approach, leveraging the expertise of multiple fund managers to optimize returns while managing risk effectively.

Common Scheme Choices Explained:

What is the Active Choice in NPS?

The Active Choice in NPS allows subscribers to decide their asset allocation across different asset classes like equity, corporate bonds, and government securities. This choice is suitable for those who have a clear understanding of market dynamics and wish to tailor their investment strategy. However, it requires continuous monitoring and adjustment based on market conditions.

Subscribers can allocate up to 75% of their funds in equity, which offers potential for higher returns but also comes with increased risk. For instance, if an investor allocates 50% of their ₹1 lakh contribution to equity and the equity market grows by 10%, the equity portion grows to ₹55,000.

What is the Auto Choice in NPS?

The Auto Choice is a lifecycle-based strategy where the asset allocation is automatically adjusted based on the subscriber's age. Younger investors have a higher equity exposure, which gradually decreases as they approach retirement. This option is ideal for those who prefer a hands-off approach to investment management.

For example, a 30-year-old subscriber might have 50% of their funds in equity, which reduces to 20% by the time they reach 50. This automatic adjustment helps in managing risk effectively as one nears retirement.

Active Choice vs Auto Choice

How to Choose the Right NPS Scheme by Age?

Choosing the right NPS scheme depends on your age, risk appetite, and investment goals. Younger investors might prefer the Active Choice or MSF schemes for higher equity exposure, aiming for greater returns. As you age, shifting to Auto Choice or investing in 2-3 MSF schemes with varying equity exposures can offer a balanced approach, reducing risk while ensuring steady growth.

It's essential to regularly review the performance of your chosen scheme. Market conditions and personal circumstances can change, impacting your retirement corpus. Always check the latest returns and adjust your strategy accordingly.

To understand NPS better and get personalized advice, you can book a call with our expert advisors: Book a one:one call

Who These Rules Don't Apply To

These guidelines may not suit everyone. Individuals with specific financial goals or those nearing retirement might require a tailored approach. Additionally, NRIs have distinct tax implications and repatriation rules to consider. Always consult a financial advisor to ensure your NPS strategy aligns with your unique needs.

This article explains the rules as they stand; it is not tax or legal advice. Check the official source or a tax adviser for your own case.

How to Pick the Right Scheme and Invest with PensionBox

Choosing the right NPS scheme involves assessing your financial goals, risk tolerance, and investment horizon. For those who prefer a hands-on approach, the Active Choice allows for personalized asset allocation. If you prefer a more automated strategy, the Auto Choice or MSF can be suitable. PensionBox offers a seamless platform to manage your NPS investments, providing expert guidance and tools to optimize your retirement savings.

Frequently asked questions

What is the difference between Active Choice and Auto Choice in NPS?

Active Choice allows subscribers to decide their asset allocation across different asset classes like equity, corporate bonds, and government securities, up to 75% in equity. Auto Choice automatically adjusts the asset allocation based on the subscriber's age, reducing equity exposure as retirement approaches.

How does the Multi Scheme Framework (MSF) work in NPS?

The Multi Scheme Framework (MSF) allows for broader diversification, including up to 100% equity exposure, and relies on fund managers to make investment decisions. It is designed for those who prefer a hands-off approach and allows for a combination of different pension fund managers.

Can NRIs invest in NPS and what should they consider?

NRIs can invest in NPS, but they should be aware of distinct tax implications and repatriation rules. It's advisable for NRIs to consult a financial advisor to ensure their NPS strategy aligns with their unique needs.

How do I choose the right NPS scheme based on my age?

Younger investors might prefer the Active Choice or MSF for higher equity exposure and potential returns. As you age, shifting to Auto Choice or investing in multiple MSF schemes with different equity exposures can provide a balanced approach, reducing risk while ensuring steady growth.

How does the tax benefit work for NPS contributions?

NPS contributions are eligible for tax deductions under section 80CCD(1B) for an additional ₹50,000, applicable only in the old tax regime. Employer contributions are deductible up to 14% of basic + DA in the new regime and 10% in the old regime for the private sector.

What are the common mistakes to avoid when choosing an NPS scheme?

Common mistakes include not aligning your scheme choice with your age and risk appetite, neglecting to review and adjust your asset allocation regularly, and misunderstanding the tax implications of withdrawals. It's crucial to stay informed and consult with financial advisors if needed.