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Investment Options under NPS

Sometimes, it is hard to find a good investment option. While choosing to invest is a big choice by itself, choosing to invest in a particular tool is an even bigger decision. We are here to walk you through one of those main investment choices you would generally think of investing in, i.e., NPS and the investment options under it.

What is an NPS?

NPS, when expanded, means the National Pension Scheme. It is a government-backed retirement plan. It will let you save for retirement, and it is market-linked. It has a defined contribution and also invests in a diverse portfolio.

This diverse portfolio has several assets, and about all of them, we will speak in this post. 

How Does an NPS Investment Work?

In a national pension scheme, you will make regular deposits, and it will accumulate wealth based on the deposits made and income generated through the assets. You can also calculate the income generated through the NPS calculator. Here is a small brief of how the investment tool works:

a) The Contributions

It is the individuals’ or the investor’s contributions made into the account. An added benefit is that the person’s employer can also make contributions. 

b) Asset Classes

As mentioned earlier, this investment has several underlying assets that help it generate returns for investors. 

c) Investment Options

NPS comes in multiple paths of investments, such as Auto, Active, Pension Fund Managers, and more as the choice of investments. 

d) Tax Benefits

NPS investments allow investors to receive additional tax benefits of up to Rs. 50,000 in every financial year under section 80CCD (1B). It also offers a tax saving benefit of up to Rs. 1.5 lakhs under Section 80CCE. However, these tax benefits will only be applied to a Tier I account.

e) Service Charges

You will also have to pay a certain amount of service charges for your investments. The service charge will vary based on the sector you work for. 

f) Retirement

After retirement, you can withdraw a specific percentage of the surplus, and the balance will be received as a monthly pension. 

What are the Investment Options Under NPS?

The National Pension Scheme invests mainly in two forms of assets: equity and debt. The debt could be corporate bonds, Government bonds, or a mix of the two. The scheme sometimes also invests in alternative funds. 

The proportion of the investment needs to be put into the two kinds of assets based on your particular risk holding. Moreover, the proportion could also be based on the kinds of options. There are three options: aggressive, conservative, and moderate. 

  • An aggressive fund would usually invest 75% in equity. 
  • A moderate fund would invest 40% in equity. 
  • A conservative fund would be 50:50.

Auto Mode Vs Active Mode

Both these options are suited to different kinds of investors. Auto mode puts no stress on you when choosing the equity-debt mixture. They would be predefined on their age and choice while investing in the fund. This would change as you grow older. 

Active mode is when you need to select the picture of the investment on yourself. If you know your risk profile and how to gain returns, you can certainly make this choice by yourself. 

As an NPS subscriber, you get to pick which option to exercise and which fund manager to invest with. The flexibility of NPS lets you change your fund manager once a year and your investment plan four times each year. 

The transfer is permitted for investments in NPS Tier I and Tier II accounts. These features give you options based on your life stage and asset allocation preferences.

Here is a gist of how the underlying assets of an NPS fund would look:

Active Investment ClassEquity (E)Corporate (C)Government (G)
Permissible allocationUp to 75%Up to 100%Up to 100%
Investment RiskHighMediumLow
Investment Return (potential)HighMediumLow

The NPS calculation comprises determining the maximum permissible equity exposure for both the Active and Auto Choice options. An NPS member can allocate up to 75% of their funds to equities exposure under the Active Choice option. In contrast, one can invest up to 100% in corporate or government bonds.

In the case of Auto Choice, equity exposure is further limited. The Aggressive Life Cycle Fund allows the most equity exposure under the Auto Choice option. However, as the subscriber reaches 55, the equity exposure steadily decreases to 15%.

The PFRDA (Pension Fund Regulatory and Development Authority) reasoning for this method is to reduce the impact of market volatility on equity investments as the subscriber approaches retirement. By gradually modifying the equity allocation, the Auto Choice option attempts to offer consumers a more balanced and consistent investing plan as they enter retirement.


Now that you know what actually comes under NPS, have you considered it your choice of investment? If so, go ahead and make yourself some good returns. There are hundreds of instruments that let you earn your returns, and some of them just stand firm, such as NPS. 

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