The National Pension System (NPS) has just gone through a silent revolution—and it is set to change how India retires. Traditionally, the NPS has been viewed as a rigid government plan with very limited options and control for its subscribers. Well, not anymore. The Pension Fund Regulatory and Development Authority (PFRDA) has recently introduced the Multiple Scheme Framework (MSF) that allows non-government NPS subscribers to hold multiple schemes with different risk levels, including options with up to 100% equity allocation. Moreover, the NPS subscribers can exit the scheme after 15 years. For a change, investing in NPS sounds exciting, isn’t it? But before you rush in to go all-in on equities to build a solid retirement corpus, take a moment. There are a number of factors to consider when determining whether the new 100% equity option in NPS is the right choice for you. Read on to find out.
NPS Multiple Scheme Framework: What changes in NPS?
Starting October 1, the PFRDA has permitted pension fund managers to launch a new type of scheme that offers greater flexibility. Each scheme under the MSF will have two variants: one with moderate risk and another with high risk, offering an equity allocation of up to 100%.
Previously, each fund house could offer only one ‘common scheme’ per asset class. The earlier NPS plans have been reclassified as ‘common schemes.’
The cap on equity allocation in NPS was limited to 75% under the common schemes, and this limit would decrease as you age to reduce exposure to high equity volatility. However, this will change with the new schemes launched under the MSF, as NPS subscribers will have the option to choose 100% equity. Remember that your fund manager will manage the asset allocation and rebalance the portfolio depending on the market conditions, not you.
Another significant change from the old NPS structure is the flexibility in exit rules. The minimum vesting period for the schemes launched under the MSF will be 15 years or retirement (60 years), whichever is earlier. For example, a 30-year-old who invests in one of the NPS schemes under the MSF can withdraw 60% of the corpus and use the remaining 40% to purchase an annuity after 15 years, at age 45. If a 50-year-old is investing in NPS MSF schemes, he can invest until the age of retirement, which is 60 years. In common schemes, you must remain invested in NPS until you reach age 60. NPS withdrawal norms remain the same—60% of the corpus can be taken tax-free, while 40% must be used to purchase an annuity.
It’s also important to note that common schemes charge as little as 0.05% to 0.11%% in fund management fees. However, NPS MSF schemes can levy fees of up to 0.3%. Over the decades, this difference can significantly impact returns.
In summary, investors will have more choices, flexibility, and control than ever before.
NPS 2.0: More choice and flexibility for NPS subscribers, know why
Until now, the NPS was akin to a one-size-fits-all solution. The regulator now aims to change this by offering subscribers greater choice. There is no longer a cap on the number of schemes a subscriber can select—investors can distribute their contributions across high, moderate, and low-risk options according to their individual needs. In a way, the NPS is allowing you to maintain a diverse portfolio. You can mix high-risk equity with conservative debt options under a single NPS account, thus enhancing the diversification of your retirement corpus.
If you are an existing customer of NPS common schemes, you can’t transfer your existing scheme to NPS MSF scheme. Only fresh contributions are allowed to NPS MSF schemes as of now. Existing NPS subscribers can pick a new scheme launched under NPS MSF and start investing.
100% equity schemes in NPS: Who should invest, who should stay away?
NPS 100% equity scheme could be a game-changer in the long term
In a world where everyone is chasing high returns, 100% equity is undoubtedly a tempting choice for investors. But is opting for a high-risk option truly right for your retirement corpus?
Answering this, Sumit Mohindra, CEO at ICICI Prudential Pension Funds Management Company Ltd., states, “The 100% equity allocation under the MSF is designed for investors planning for the long term—say, 15 to 20 years—who are comfortable with a higher exposure to equities. Equities are arguably the best way to combat inflation over such a long horizon. High equity exposure only becomes risky if your time frame is short. However, for 15-20 years, it works quite well.”
But when you don’t have such a long horizon to invest, say you are starting at the age of 45, do you really want to go all-in and pay a higher expense ratio while facing much higher risk?
Be prepared for the ups and downs of the equity
When investing in equities, remember that their performance tends to fluctuate, with significant ups and even sharper declines. A 100% equity allocation exposes your entire NPS retirement corpus to market fluctuations, as there is no buffer from less volatile assets like debt. A substantial fall in the market before you begin withdrawals means you will be selling more units at lower prices, thereby diminishing your retirement income.
Age and risk-appetite don’t always go hand in hand
The common rule you’ll often hear is that if you are young and can tolerate the volatility of equity, you should fully commit to equity. Conversely, those nearing retirement—say, around age 50—may steer clear. However, such generic advices should be avoided when it comes to investment planning. Because one size does not fit all.
A 30-year-old could easily be averse to the risks associated with equity and opt for a safer choice, such as NPS common schemes. On the other hand, a 50-year-old might possess the appetite for equity that a 20-year-old lacks.
So, your investment should be based on your financial personality, needs, wants, circumstances and multiple other factors that are unique to you, not just your age.
Read More: Find out your financial personality. Take our MoneySign® assessment
You can’t switch to another scheme under MSF before 15 years
Another crucial point to consider is that you cannot switch between NPS MSF schemes if your chosen scheme does not perform well before you complete 15 years. You will have a one-time option to revert to NPS common schemes offered by the same fund manager if you wish to exit prior to the 15-year mark.
After 15 years, you will have the option to switch between new funds launched under the MSF.
Think about overall asset-allocation in portfolio
If the prospect of asset allocation excites you and you wish to hold multiple schemes for your retirement, remember that your asset allocation should be guided by your financial personality and goals, not solely by the product. Whether a 100% equity allocation is right for your retirement planning will depend on your financial personality, your retirement goals and timelines, your current equity allocation in the portfolio, and how much additional exposure you seek, says Abhishek Kumar, a SEBI-registered RIA and the founder of SahajMoney.
Common NPS schemes may still win
The longer lock-in period associated with NPS common schemes can actually benefit younger investors by instilling the discipline of regular, consistent contributions. Your retirement phase is likely to be one of the longest periods of your life, so building a substantial corpus is essential to sustain it.
If you start investing in NPS at age 30, withdraw at 45, and start taking an annuity, there is a high likelihood that your NPS corpus could deplete sooner than expected. Will you be able to last on annuity income from the age of 45 to 75? Something you need to think about.
You have an option to keep the funds in the NPS system even after 15 years, say till the age of 60 years. However, there is a significant chance that you might choose to access those funds before retirement when the option is available to you. So the smaller lock-in is not always as beneficial as you think it is.
Ask yourself: Does 100% equity in NPS align with my retirement planning?
So rather than asking whether you should go all in with 100% equity in NPS, you should consider if it aligns with your financial personality and overall retirement planning. The answer will be personal rather than a standardised cookie-cutter response applicable to everyone. Therefore, it’s better to consult a Qualified Financial Advisor (QFA) who truly understands you—your financial personality, risk appetite, goals, overall asset allocation, and retirement planning. It is wise to discuss these factors with a qualified adviser when making any investment decisions, especially regarding retirement.
