Lifecycle fund
The NPS Auto Choice investment option that shifts a subscriber's money away from equity and toward safer bonds and government securities automatically, as they age.
In plain language
Not everyone wants to pick their own mix of stocks and bonds each year. The lifecycle fund does that job for you instead.
Under the NPS, you can choose your own mix of assets. This is called the Active Choice. Or you can let a fund choose for you. This is the Auto Choice, and it puts your money into the lifecycle fund.
The fund changes your mix as you age. It holds more in equity while you are young. It holds more in safe bonds and government securities as you grow older. That one shift, tied to your age, is the whole idea behind it.
How it works
The workbook describes the lifecycle fund only in terms of that automatic, age-linked shift — it does not set out a specific percentage schedule tied to particular ages in this booklet.
What the same page does give a figure for is the manual alternative, Active Choice, which puts a ceiling on two of the four available asset classes: the proportion invested in asset class E (Equity) cannot exceed 75 percent, and the proportion invested in asset class A (Alternative Investments) is restricted to 5 percent. The lifecycle fund exists precisely so a subscriber who does not want to manage those proportions every year does not have to — the fund manages the equity-to-safety shift on their behalf as they age.
A worked example
Deepa opens an NPS account at age 28 and chooses Auto Choice, putting her contributions into the lifecycle fund rather than picking her own E, C, G and A proportions.
In her twenties and thirties, the fund holds a larger share in equity, aiming for growth over her long working life. As Deepa nears her sixties, the same fund automatically increases its share in corporate bonds and government securities and reduces its equity exposure — without Deepa filing a single instruction to change it.
Her colleague Ramesh, who prefers to manage his own mix, instead chooses Active Choice and sets his equity allocation at the maximum the workbook allows: 75 percent, adjusting it himself as he ages instead of leaving that adjustment to the fund.
Why NISM asks about it
Chapter 7 (Pension, Retirement and Estate Planning) introduces the lifecycle fund immediately after the NPS Auto Choice and Active Choice options, and immediately after the 75 percent equity and 5 percent alternative-investment ceilings under Active Choice. Expect a question contrasting Auto Choice (lifecycle fund, age-linked, automatic) with Active Choice (subscriber-selected, capped at 75 percent equity).
Common exam traps
- The lifecycle fund is the Auto Choice; a subscriber who wants to set their own mix uses Active Choice instead.
- Equity exposure decreases with age in the lifecycle fund — a candidate who reverses the direction has the concept backwards.
- The 75 percent and 5 percent ceilings belong to Active Choice, not to the lifecycle fund, which does not carry a stated percentage schedule in this booklet.
- The lifecycle fund is not a separate pension scheme — it is one way of investing within the same NPS account.
Check yourself
1.What happens to the asset allocation under NPS Auto Choice as a subscriber ages?
- a)The allocation stays fixed at the proportions chosen at the outset
- b)Exposure to equity decreases and exposure to the safer corporate bonds and government securities increases with the age of the subscriber
- c)Exposure to equity increases with age to make up lost time
- d)The entire corpus moves into alternative investments after age 50
Show the answer
Answer: (b) Exposure to equity decreases and exposure to the safer corporate bonds and government securities increases with the age of the subscriber
"AUTO CHOICE OPTION - Under this choice the subscriber's contribution will be invested in the LIFECYCLE FUND. The lifecycle fund is a DYNAMIC ALLOCATION of the subscriber's wealth to the different asset classes in a defined proportion DETERMINED BY THE AGE OF THE SUBSCRIBER, with the EXPOSURE TO EQUITY DECREASING and that to the SAFER CORPORATE BONDS AND GOVERNMENT SECURITIES INCREASING with the age of the subscriber." This is Chapter 3's asset allocation put on rails: that chapter required allocation "depending on your AGE, lifestyle, family commitments and your financial goals" and regular review, and the lifecycle fund performs the age adjustment even for a subscriber who never logs in. Option (c) describes the "catch-up" instinct, which is exactly the wrong risk at the wrong time — a short horizon has no room to recover from a fall, which is precisely why the design reduces equity as retirement approaches.
2.A subscriber eight years from retirement wants to move his entire NPS corpus into equity to "catch up". What applies?
- a)He may do so under Active Choice, which has no limits
- b)Active Choice caps asset class E at 75 per cent and A at 5 per cent — and in any case a shortening horizon is the wrong time to raise equity, which is why the lifecycle fund reduces equity with age
- c)He must switch to Auto Choice, which will put everything in equity
- d)He may do so only under Tier II
Show the answer
Answer: (b) Active Choice caps asset class E at 75 per cent and A at 5 per cent — and in any case a shortening horizon is the wrong time to raise equity, which is why the lifecycle fund reduces equity with age
The rule first: "the ONLY RESTRICTION is that the proportion invested in asset class E CANNOT EXCEED 75 PERCENT and that in asset class A is RESTRICTED TO 5 PERCENT", so a fully equity portfolio is simply not available. The judgement second, and it matters more. Chapter 5 defines volatility risk as prices fluctuating "even when those companies aren't in danger of failing", and Chapter 3 classifies horizons — eight years sits at the boundary of long-term and is shortening every year. A market that falls in year seven leaves no time to recover before the corpus must be annuitised. That is exactly why Auto Choice's lifecycle fund works the other way: "exposure to equity DECREASING and that to the safer corporate bonds and government securities INCREASING with the age of the subscriber." Option (c) inverts what Auto Choice does. The "catch-up" instinct takes the largest risk at the moment there is least capacity to absorb it.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Auto ChoiceThe NPS investment option in which your contributions go into a lifecycle fund that automatically cuts equity and raises corporate bonds and government securities as you grow older.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- Permanent Retirement Account NumberThe unique account number issued when an NPS account is opened; it stays with the subscriber for life and across employers, which is what makes NPS portable in a way EPF historically was not.
- PensionA regular payment a person receives after retiring from regular work, or on reaching a certain age, so they have an income once they stop earning.