Understanding NPS Better: Where does your money get invested?
- January 18, 2022
- Posted by: MvM Team
- Category: Retirement Planning
It is necessary to know the structure and asset allocation in the scheme to understand NPS better.
STRUCTURE OF NPS
PFRDA
As the Stock market is regulated by SEBI likewise, NPS gets regulated and administered by the Pension Fund Regulatory and Development Authority. PFRDA was established on 23rd August 2013 by the Government of India. It became an autonomous body from 2014-15 onwards.
FUNCTIONS OF PFRDA:
1. PFRDA acts as a regulator and administers National Pension System (NPS). It also administers Atal Pension Yojna.
2. It keeps a check on the pension fund managers who are investing the money of subscribers and assuring them Risk-free return at the time of their retirement.
3. It provides a grievance redressal mechanism for their subscribers.
4. Provides time to time training to the intermediaries who are involved in NPS and also provides training to their subscribers regarding their new pension scheme to keep them updated and educated, enabling them to select the best retirement plan for themselves.
5. PFRDA conducts a thorough investigation of all the intermediaries. It audits all the entities or people connected with pension funds.
PENSION FUND MANAGERS
PFRDA has appointed 7 Fund Managers to manage the contributions invested by NPS subscribers in his account. They are government approved and manage the funds.
1. LIC Pension Fund
2. UTI Retirement Solutions
3. SBI Pension Funds
4. HDFC Pension Fund
5. ICICI Prudential Pension Funds
6. Aditya Birla Sun Life Pension Management
7. Kotak Mahindra Pension Fund
An NPS account holder has the privilege to choose its Fund manager, who he/she can change if not satisfied with the performance or management.
Note: Government employees’ funds are managed by LIC, SBI, and UTI only.
PRAN
PRAN (Permanent Retirement Account Number) is a unique 12 digit account number issued to the subscribers of the National Pension Scheme by the Central Record Keeping Agency (CRA) that is NSDL. This account number is similar to the Permanent Account Number (PAN) to help the subscriber access or login into his/her account.The account for which PRAN gets issued to the subscribers is known as Permanent Retirement Account (PRA).
POP
These are local bodies or institutions such as Bank near your household in which the subscriber can approach and apply for the National Pension Scheme (NPS). These are the starting point which directly deals with the customers of NPS.
FUNCTIONS OF POP:
1. They help in the registration of subscribers under this scheme by taking certain documents and verify their KYC details.
2. Helps in marketing NPS as they are the first person to whom customer contacts.
3. They receive the grievances of the subscribers and upload the same in the Central Grievance Management System (CGMS) of CRA.
4. They accept the contributions or funds from the subscribers and transfer the same to the trustee bank or Pension Fund Manager, who in turn invests the funds in the subsequent investment avenues.
NOTE
Lock-in-period – It is the period until which the NPS funds are locked in the account. Till 60 years of age, the funds remain locked. The subscriber can also continue his account and defer till 70 years of age.
WHERE DOES YOUR MONEY GET INVESTED?
Through NPS, the money gets invested in 4 asset classes –
Basis | Equity | Government Bonds | Corporate Bonds | Alternative Investments |
Investment Criteria | Asset Class E: Money gets invested in the share market. | Asset Class G: Money is lent to the Government through government bonds. | Asset Class C: Money is lent to private corporates or public organizations through corporate bonds. | Asset Class A: Money gets invested in instruments like AIFs (Alternate investment funds), REITs (Real estate investment trusts), etc. |
Risk Factor | Very High Risk | Low Risk | Moderate Risk | High Risk |
Asset Allocation Rule
The account holder gets the right to decide the asset allocation factor in his account. There are two ways to choose from –
Active Choice
- This option allows the investor to decide the ratio and split his investment as per his discretion in which he wants to invest his funds among different classes of assets – E, G, C, and A. The holder directs his Fund manager the percentage in which he wants his money to be invested.
- It follows the maximum and minimum investment limits. Hence, the investor can opt for any combination after considering the limits.
- Here, the investor is also allowed to change its asset allocation twice a year and switch his investment option if he prefers.
Conditions applied –
- Allocation of funds in Alternative investments is allowed up to 5%.
- The subscriber can invest maximum 75% of his funds in equity, up to the age of 50. And afterward, the percentage starts reducing by 2.5% every year and reaches 50% till the age of 60. So, the person with the age of 60 or above can invest 50% maximum in equity.
Auto choice
- It is the default option given to the subscriber. Under this choice, the holder can automate his investments, and the funds will be managed automatically by the fund manager as per the risk profile of the investor based on his age.
- There are three risk profiles given as per the age of the investor, and the funds get allotted accordingly. For example, there is a less risky profile for old persons.
Given below are the profile and its asset allocation –
Risk Profiles | Allocation in Class E | Allocation in Class C | Allocation in Class G |
Aggressive | 75% | 10% | 15% |
Moderate | 50% | 30% | 20% |
Conservative | 25% | 35% | 40% |
