NPS’ New Balanced Lifecycle Fund: Can It Add Value to Your Retirement Portfolio?
The newly introduced Balanced Lifecycle Fund under the National Pension System (NPS) offers automatic asset rebalancing, making it a viable option for conservative investors.
- However, financial advisors suggest that younger investors may benefit more from active asset allocation, which allows greater control over investments.
- This fund aims to strike a balance between risk and stability, making it an alternative to aggressive and moderate lifecycle funds.
What Is the Balanced Lifecycle Fund?
The Pension Fund Regulatory and Development Authority (PFRDA) has launched the Balanced Lifecycle Fund, providing age-based rebalancing of asset classes.
- This fund allocates investments across equity (E), corporate debt (C), and government securities (G) based on the subscriber’s age and risk tolerance.
- Up to 45 years of age, the maximum equity allocation is 50%, while corporate debt is 30% and government securities make up 20%.
- After 45 years, equity allocation gradually reduces, and by 55 years, it is capped at 35%, while government securities dominate with 55% exposure.
Asset Allocation Under the Balanced Lifecycle Fund
The fund dynamically adjusts risk exposure as an investor nears retirement.
| Age | Equity (E) | Corporate Debt (C) | Government Securities (G) |
|---|---|---|---|
| Up to 45 years | 50% | 30% | 20% |
| 46 years | 48% | 28% | 24% |
| 47 years | 46% | 26% | 28% |
| 48 years | 44% | 24% | 32% |
| 49 years | 42% | 22% | 36% |
| 50 years | 40% | 20% | 40% |
| 51 years | 39% | 18% | 43% |
| 52 years | 38% | 16% | 46% |
| 53 years | 37% | 14% | 49% |
| 54 years | 36% | 12% | 52% |
| 55 years & beyond | 35% | 10% | 55% |
This gradual shift from equities to debt and government securities aims to protect the retirement corpus from market volatility.
Why Introduce a New Fund Choice?
The NPS already offers auto allocation options, including aggressive, moderate, and conservative lifecycle funds.
- Under the aggressive lifecycle fund, investors below 35 years can allocate up to 75% in equities, while for those under 45, the cap is 35%.
- The Balanced Lifecycle Fund offers a mid-point, allowing higher equity allocation than moderate funds but lower than aggressive ones.
- Many young investors felt that the existing auto allocation choices were too restrictive, making this fund a more flexible option.
Higher Equity Allocation for Greater Returns
A higher allocation to equities can potentially yield better long-term returns, provided investors can handle market fluctuations.
- Conservative investors who prefer lower risk may opt for higher allocations in corporate debt and government securities.
- Market data suggests that many investors are now looking for greater equity exposure to build a larger retirement corpus.
Should You Choose the Balanced Lifecycle Fund?
Financial advisors favor active asset allocation, as it allows higher control over investments and potential for higher returns.
- In the Balanced Lifecycle Fund, equity exposure reduces automatically with age, limiting the potential for higher wealth creation.
- For example, a 45-year-old investor under this fund will have 50% equity exposure, while under active allocation, it could be up to 75%.
- Over ten years, a 25-percentage-point difference can have a significant impact on the final retirement corpus.
While the Balanced Lifecycle Fund offers a structured, low-maintenance approach, those who prefer greater control over their retirement planning may find active allocation more rewarding.
