Is 75 Per Cent Equity Allocation In NPS Right For Young Salaried Investors?

For any investor - be it young or old - asset allocation plays a more important role than security selection. When individuals are young and have 20 to 30 years until retirement, the time horizon becomes an important consideration.

One can truly see the benefit of compounding in equities over a longer tenure, as there might be drawdowns or consolidation over shorter time-frames. Overall, equity as an asset class tends to be volatile in the short term, but historically it has delivered higher returns than debt over long investment horizons.

“When one factors in time in asset allocation, dedicating a major allocation towards equities becomes a sensible approach to maximize the growth of wealth over longer time-frames. Thereby, having close to 75 per cent equity allocation in NPS and the remaining towards debt or select alternatives (such as REITs/ InvITs) provides strong portfolio growth opportunities, while debt allocation provides stability and minimizes overall portfolio risk,” says Amar Ranu, Head-Investment Products & Insights, Anand Rathi Shares and Stock Brokers.

However, this approach may not be suitable for all salaried young investors as many factors come into play, including age and investment time horizon.

Firstly, it is important for an individual to be aware about their job and income stability as well as the emergency savings available at any given point of time. Secondly, it is important for an individual to assess their willingness to take risks, which involves personal comfort with the fluctuations in the market value.

“Even at a young age, a slightly balanced allocation might be more sensible if an investor has anxiety during market losses and is prone to move to safer assets at the wrong moment. Returns are frequently more impacted by behaviour than by the allocation itself. Decisions should be made based on long-term discipline rather than short-term market views because NPS is a long-term, highly illiquid retirement product,” says Ranu.

If one is aware about the lifecycle fund in NPS, it basically does the same. When an investor is young, there is a high allocation towards equities, and it reduces as the investor moves towards retirement.

Therefore, for disciplined young salaried investors who understand market volatility and have adequate emergency funds outside NPS, maximising the allowed equity exposure can be an efficient way to build retirement wealth. On the other hand, investors who prefer stability, have irregular income, or are uncomfortable with fluctuations may choose a more balanced mix without feeling that they are making a mistake.