The NPS Balanced Life Cycle Fund allows subscribers to invest 50% in equities for up to 45 years, significantly higher than other schemes

New NPS investment: Save Rs 57 lakh more for retirement with new NPS Balanced Life Cycle Fund this way This longer equity exposure can potentially yield higher returns over time. Who should opt for the new NPS Balanced Life Cycle Fund? How to use new NPS Balanced Life Cycle Fund to build a bigger retirement corpus

National Pension Scheme (NPS) subscribers now have a new investment scheme — the Balanced Life Cycle Fund. It allows NPS subscribers to invest 50% of their investments in equity funds for a longer period of up to 45 years, significantly higher than the current limit of 35 years offered in other schemes. Who should opt for the new NPS Balanced Life Cycle Fund? Will the Balanced Life Cycle Fund help you to build a bigger retirement corpus? ET Wealth Online decodes the new NPS Balanced Life Cycle Fund for NPS investors.

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What is the NPS Balanced Life Cycle Fund?
The recently introduced Balanced Life Cycle Fund is mostly similar to other auto investment allocation schemes under the NPS. The key factor that sets this scheme apart from others is the age threshold, after which the scheme's equity allocation will gradually decrease. Under the Balanced Life Cycle Fund, NPS subscribers' equity allocation of 50% will remain unchanged until they are 45. Corporate debt allocation (scheme C) will be 30% and G-sec (scheme G) exposure 20%. After reaching 45, the fund manager will decrease the equity allocation by 2% every year. So, in next 5 years the equity allocation will be reduced to 40% by the time subscriber reaches the age of 50. There onwards it is reduced by 1% each year and is capped at 35% for those over 55 years of age.

Allocation to corporate bond (Scheme C) will also gradually come down 2% annually from 30% at the age of 45 to 10% at the age of 55.

During the same period scheme G (government securities) will have the highest allocation increase to 55%.

Advantages of NPS Balanced Life Cycle Fund
In the other existing auto choice options (aggressive, moderate and conservative), the tapering starts from the age of 35 years. While aggressive subscribers do enjoy above 50% allocation at the age of 45, moderate and conservative allocations have to settle with much lower equity allocation. Even for a relatively risk adverse investor a longer investment horizon with higher equity allocation can help in deriving higher returns.

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"Investment in Balanced Life Cycle Fund allows the subscriber to benefit from the power of compounding offered by the equity asset class for a longer period thus potentially allowing the subscriber to generate better returns through NPS investment," says Kurian Jose, CEO, of Tata Pension Management

This works for subscribers who are not very aggressive but still want to derive the best out of equity allocation for a longer period.

Manmeet Singh Khurana, a Certified Financial Planner and Founder of Wealth Dopes says, "The equity allocation in this fund is at 50% till the age of 45 which is an additional ten years as compared to Moderate Life Cycle Fund in which the equity allocation starts to taper after the age of 35. And this is where the difference starts to accrue and get larger with time and contribution. Not only this, Balanced Life Cycle Fund retains a 35% allocation to equites upon attaining the age of 55 and beyond which is 25% more as compared to Moderate Life Cycle Fund. So both these factors put together help you compound your investments at a far higher pace."

Can NPS subscribers build a bigger retirement corpus with a Balanced Life Cycle Fund corpus?
Higher equity allocation can lead to potentially higher returns over the long term, thereby contributing significantly to wealth creation.

Khurana explains, "An investor who starts contributing to NPS from the age of 25 and chooses Balanced Life Cycle Fund over MCL and continues to contribute up to the age of 60 could end up with a 22% higher NPS corpus by the time he/she attains the age of 60."

Assume a 25-year-old starts investing in NPS. His basic salary is around Rs 30,000 a month. He invests 10% of his salary i.e. Rs 3,000 in NPS every month. He also invests Rs 50,000 in NPS to save tax.

Now imagine his salary is hiked by 8% every year. With every salary hike, he increases his contribution towards NPS.

Now if he chooses to invest in Moderate Life Cycle Fund (it maintains an equal proportion of equity and debt in its portfolio until subscribers turn 35, after which the equity allocation begins reducing), he will get Rs 31,561,893 at the time of retirement.

If he opts for the new Balanced Life Cycle Fund and continues to invest regularly till the age of 60, he will get Rs 35,856,512. As you can see, a Balanced Life Cycle Fund gets you Rs 4,294,619 more or 14% higher return than a Moderate Life Cycle Fund, Khurana adds.

Starts investing in NPS at 25
Starting basic salary	Rs 30,000	Rs 50,000	Rs 70,000	Rs 1 lakh
Starting monthly NPS contribution (10% of the basic salary)	Rs 3,000	Rs 5,000	Rs 7,000	Rs 10,000
Yearly hike	8%	7%	6%	5%
Yearly NPS contribution under Section 80CCD (1B)	Rs 50,000	Rs 50,000	Rs 50,000	Rs 50,000
Return from Moderate Life Cycle Fund at 60:	Rs 31,561,893	Rs 42,748,681	Rs 52,210,321	Rs 65,600,087
Return from Balanced Life Cycle Fund at 60:	Rs 35,856,512	Rs 48,478,995	Rs 59,173,859	Rs 74,318,002
Difference between Balanced Life Cycle Fund and Moderate Life Cycle Fund	Rs 42,94,623	Rs 57,30,314	Rs 69,63,537	Rs 87,17,915

Assumed return from equity is 12%, corporate bond is 8%, government securities is 7%
Source: Manmeet Singh Khurana

Who should opt for the new NPS Balanced Life Cycle Fund?

Rajani Tandale, Senior Vice President, of Mutual Funds at 1 Finance answers, "The new Balanced Life Cycle Fund in NPS is ideal for those seeking a middle path between growth and risk management with a conservative approach, maintaining 50% equity exposure until age 45 before gradually reducing it. Conservative investors aiming for balanced growth with automatic risk adjustment should consider this scheme. The BLC allows steady equity exposure before gradually transitioning to a more secure debt allocation."

Balanced Life Cycle Fund is a progressive addition to the existing three options available under the auto choice as it leans more towards equities offering higher chances of a bigger retirement corpus. "It is most suited to investors who start early as they would tend to gain the most due to their investment horizon and difference in compounding rates. Investors beyond the age of 35 should consider shifting to this fund incase if they are looking at relatively higher exposure to equities as compared to what Moderate Life Cycle Fund and Conservative Life Cycle Fund funds offer," says Khurana.

This story originally appeared on: India Times - Author:Faqs of Insurances