The National Pension System (NPS) allows investments until age 60 to build a retirement corpus fund with tax benefits under the old tax regime. The scheme offers flexibility by providing an auto and active mode of investment facility, hugely contributing to its popularity. 

The subscriber can withdraw up to 60 per cent of the accumulated funds in a lump sum tax-free on retirement, and the rest must be invested in a pension plan, which is taxable. However, the annuity component can be higher than 40 per cent, depending on the individual’s choice. 

NPS invests in both equity and debt instruments, with an option to select investments in ‘Auto’ or ‘Active’ mode. The investor chooses the pension fund manager listed with the NPS and the investment option. So, which one should you choose? Auto or Active option? Let’s explore in detail about the investment options: 

Auto Choice 

In the auto choice option, the allocation percentage in different assets (equity, corporate debt, government securities, and alternative investment funds) is predetermined. The allocation in equity and corporate debt assets, considered risky, is reduced as the person ages. However, the subscriber must select from the following three investment choices. 

Aggressive: The aggressive lifecycle fund allows investments in equities up to 75 per cent of the total assets until age 35; after that, the equity allocation reduces with age. 

Moderate: The moderate option allows 50 per cent allocation in equities up to age 35, and then it starts reducing. 

Conservative: In the conservative option, the equity exposure is limited to 25 per cent until age 35; after that, it reduces as the subscriber ages. 

Active Choice 

In this option, the subscriber has more freedom to select or allocate assets vis-a-vis the age. The subscriber can invest 75 per cent in equities up to 50. After that, equity exposure will be reduced gradually. By 60 and above, it should not be more than 50 per cent. However, exposure to alternative investment funds is limited to 5 per cent. 

What Is A Better NPS Option, Auto Or Active mode? 

Priyadarshini Mulye, a Sebi-registered investment advisor and certified financial planner, says, “Both options are good”, adding that while considering these options, “An investor should have basic knowledge about each asset class or be aware of their risk profile. Also, the investor who has time to review the portfolio actively and knows about asset classes and their risk appetite can choose the active choice.” 

So, depending on the risk-taking capacity, financial knowledge, and the time available to review the fund, one may consider opting for the active option. Otherwise, the auto option would be more suitable.