NPS: What will the new Balanced Life Cycle Fund offer?

National Pension Scheme (NPS) subscribers will soon have a new string to their bow. A new NPS investment scheme, the Balanced Life Cycle Fund, will likely launch between July and August, according to PFRDA chairman Deepak Mohanty, as quoted in media reports. The new automatic option will allow subscribers to keep 50 per cent of their investments in equity funds for a longer period of up to 45 years, higher than the current limit of 35 years offered in other existing schemes.

How will it differ from the rest?

The features of the new investment option are expected to be mostly similar to other auto schemes under the NPS. The key parameter that will distinguish it from the rest is the age threshold, after which the scheme's equity allocation will begin to taper. Simply put, under the Balanced Life Cycle Fund, subscribers' equity allocation will remain unchanged until they are 45 years old. Once this age is reached, the fund manager will initiate reducing the equity allocation. This means the equity portion would be maintained for a longer tenure in this case as opposed to other existing schemes where the equity exposure begins to decline once subscribers are past 35 years.

Secondly, the equity and debt allocation will be split equally (50 per cent each) under the new option, similar to the existing Moderate Life Cycle Fund. Before deciding the best suited option for you, take a look at what the other existing NPS auto schemes offer:

LC75 or Aggressive Life Cycle Fund: The aggressive auto fund invests up to 75 per cent of its portfolio in equity. This exposure begins narrowing once subscribers cross the age of 35 years. Of all the auto funds currently offered, this option provides the highest allocation to equity.

LC50 or Moderate Life Cycle Fund: This fund is currently the default choice under the auto investment option. It maintains an equal proportion of equity and debt in its portfolio until subscribers turn 35, after which the equity allocation begins reducing. The new Balanced Life Cycle Fund's asset allocation will be similar but its equity allocation will start tapering at a much later stage, when subscribers reach the age of 45 years.

LC25 or Conservative Life Cycle Fund: This fund is the most risk averse in nature of all the auto schemes. The fund allocates only 25 per cent of its portfolio to equity. The equity allocation begins to gradually decrease after the subscriber goes past the age of 35 years like in other cases.

Our take

For NPS subscribers seeking the benefit of their equity component for a longer period, the Balanced Life Cycle Fund could be a cause to let the corks fly. It would enable them to maintain half of their allocation parked in equity for an extra ten years, potentially creating a larger retirement corpus than what is possible in the default option i.e., the Moderate Life Cycle Fund. Since the equity exposure will be maintained for a longer time in the new scheme, the pooled investment would generate potentially higher returns.

That said, when investing for retirement, which is at least five to seven years away, one should seek maximum allocation to equity through the active investment choice under the NPS over the auto options. Under the active route, subscribers can allocate up to 75 per cent of their portfolio to equity without any age-related limits for reducing the equity exposure. This option will fetch subscribers higher returns in the long-term than even the Aggressive Life Cycle Fund, which has the maximum equity allocation under the auto option. Hence, NPS schemes with the highest equity weightage and the longest possible tenure for maintaining the equity allocation are ideal.

Also read: NPS Auto or Active Choice? Which to choose?