Don't let past year's return guide you while deciding on asset allocation

Government bond and corporate bond schemes of the National Pension System (NPS) have outperformed equity schemes over the past year. Experts say the new entrants should take a longer-term view, and not be unduly influenced by one-year returns, while deciding their asset allocation in NPS.

Sanjay Kumar Singh, Business Standard
15th October

Younger investors entering NPS could possibly stay invested for 25-30 years. “Over the long term, equities tend to outperform other asset classes like government and corporate bonds,” says Arvind Rao, chartered accountant and founder, Arvind Rao & Associates. Hence, a young investor can boost his longer-term return by taking a higher allocation to equities, provided his risk appetite permits. Longer-term returns of government and corporate bond schemes are unlikely to be in double digits.

NPS offers two investment choices — active and auto. In the former, the investor gets to select the percentage he would like to allocate to various asset classes. Equity allocation is capped at 75 per cent till the age of 50, after which it is tapered gradually to 50 per cent by age 60.

Under auto choice, investors may select one of three lifecycle (LC) funds: aggressive, moderate, and conservative (maximum equity exposure allowed is 75 per cent, 50 per cent, and 25 per cent, respectively). Equity exposure in all three is reduced gradually from age 35 onwards.

According to Malhar Majumder, founding partner, Positive Vibes Consulting, “Active choice is for savvy investors who can handle equity market volatility and rebalance their investments.” One way to do this would be to direct new money into the underperforming asset class.

Experts speak highly of the auto-choice option. “The allocation is age-based and your investments get rebalanced automatically. This makes it a good option for investors who are not savvy,” says Rao. Such investors, he suggests, may go with the moderate LC fund.

If you go for the active option, the simple approach would be to allocate 50:50 to equities and debt. Only investors confident about their risk tolerance should take equity exposure higher than 50 per cent.

On the debt side, again have a 50:50 split between the government and the corporate bond scheme. Alternatively, allocate slightly less to the asset class that has outperformed recently. “Over-allocating to government bonds can be risky as they will tumble more in a rising interest rate scenario,” says Ankur Kapur, managing partner, Plutus Capital.

Investors have to pick schemes belonging to the various asset classes from the same pension fund manager. “Go with a large and stable brand with a proven track record in equity fund management and a reputation for managing money conservatively,” says Kapur.

Disclaimer: This information is from a third party—Business Standard—offered through a tie-up to Kotak Securities customers. Click here for complete disclaimer.

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