Think your NPS saving is enough for retirement? Watch out for this common mistake that could derail your financial plans

For a lot of investors, the National Pension System (NPS) is something that just runs in the background, with the assumption that their retirement planning is on track. But over time, this “set and forget” approach can backfire.

This happens because though your income changes, goals evolve, and returns on different assets fluctuate, your NPS allocation may remain frozen. This can lead to a gradual misalignment that only becomes visible when your retirement corpus falls short.

How do you figure out if your retirement corpus falls short?

“Investors can identify misalignment by checking whether their current asset allocation and contribution levels are likely to generate a retirement corpus that beats inflation by a meaningful margin (typically 2–3% above inflation),” explains Vishwajeet Goel, Head of Pensionbazaar.

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If your portfolio isn’t clearing that bar, it may not be working hard enough.

For instance, if you start with a Rs 10,000 monthly contribution into NPS, increase it by 7% every year in line with salary increments, and expect an annual return of 10% over 25 years, you could build a corpus of around Rs 2.35 crore. But even a small miss on returns can significantly erode that outcome. If your returns fall short by just 1%, your corpus drops to Rs 2.07 crore, a shortfall of nearly Rs 28 lakh. A 2% lower return brings it further down to Rs 1.83 crore, a gap of roughly Rs 52 lakh from what you had planned for.

NPS Misalignment: Are you taking too much or too little risk?

Misalignment in NPS often shows up in subtle ways.

Often many younger investors play it too safe, allocating a bigger part of their portfolio to debt and missing out on long-term compounding available through growth assets like equities. At the same time, some investors take on more equity risk than they can emotionally handle.

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“If projections fall short, or if a younger investor is too conservatively invested in debt, it signals under-allocation to growth assets. On the other hand, if market volatility causes discomfort or reactive decisions, the portfolio may be too aggressive. Regularly reviewing expected outcomes versus goals is key to spotting gaps early,” says Goel.

This mismatch between portfolio and behavior can hurt returns just as much as poor fund selection.

What should your ideal NPS allocation look like?

A well-managed NPS portfolio follows a lifecycle approach, high growth in early years, stability closer to retirement.

“In their 20s, investors can take an aggressive stance with up to 100% equity exposure to fully benefit from long-term compounding. This can then be gradually reduced to around 60–70% in the late 30s and 40s, 40–55% in the late 40s and 50s, and 20–40% as retirement approaches to preserve capital,” says Goel.

For investors who don’t want to actively manage this transition, there is a simpler option.

NPS Auto Choice (a method of changing exposure to equity, government bond and corporate bond annually) already follows a predefined lifecycle-based allocation that automatically reduces equity exposure with age, making it a simple and effective option for maintaining the right balance over time, he adds.

Also Read: How NPS transformed in 2025: 80% withdrawals, 100% equity, and everything else that made it a future ready retirement planning tool

The NPS rebalancing rule most investors ignore

Even if you start with the right allocation (mix of equity and debt), it won’t stay that way.

Often sharp equity market movements can push your portfolio out of alignment. A strong bull run, for instance, can sharply increase your equity exposure without you realizing it.

“A practical approach is to rebalance when the asset allocation deviates by around 5–10% from the intended mix or at least once annually, whichever comes first. For instance, if equity allocation rises from a target of 50% to 60–65% due to market rallies, it is a clear signal to rebalance,” recommends Goel.

This disciplined approach helps lock in gains, manage risk, and maintain alignment with long-term financial goals.

Also Read: EPF vs PPF vs NPS: Which retirement investment works best for you?

How to handle bull and bear markets in NPS

Market cycles often trigger emotional decisions but NPS investing demands discipline.

During strong market rallies, portfolios can become equity heavy.

“In a bull market, investors should periodically rebalance portfolios by trimming overweight equity positions and booking partial profits, ensuring asset allocation remains aligned with long-term goals. This helps avoid overexposure at elevated valuations,” advises Swapnil Aggarwal, Director, VSRK Capital.

On the flip side, market downturns test patience.

“Conversely, during a bear market, investors should avoid panic selling and instead consider staggered investments through strategies like SIPs or phased buying to benefit from lower valuations,” he adds.

The focus should remain on steady adjustments, not extreme moves.

Beyond allocation and performance, investors should also understand the cost and tax implications of changes.

Also Read: Your retirement kitty is not tax-free in NPS, EPF and Superannuation funds: How outdated taxation is draining your savings, will Budget 2026 help?

What about tax and switching costs?

One advantage of NPS is its tax structure.

“Frequent allocation changes or switching fund managers in the National Pension System (NPS) do not attract any direct tax liability at the time of the switch, as NPS follows an EET (Exempt-Exempt-Taxed) structure and taxes are levied only at the time of withdrawal,” says Aggarwal.

However, that doesn’t mean frequent changes are a good idea. Beyond a limited number of free switches, small charges may apply, and more importantly, mistimed decisions can hurt long-term returns.

NPS vs DIY investing: structure vs flexibility

While NPS offers a disciplined, low-cost route to retirement savings, it comes with constraints.

NPS is a structured retirement product for disciplined investors who want low costs, tax benefits, and automatic asset allocation. It is accompanied by some disadvantages like low liquidity, a cap on equity investment up to 75%, and annuitisation at retirement, which may impact returns, explains Aggarwal.

A self-managed retirement portfolio, on the other hand, allows complete control over asset allocation, fund choice, and withdrawal. However, it demands more discipline and involvement but can offer better post-tax returns and liquidity, he adds.

The choice depends on how actively you want to manage your money, but in both cases, regular review is non-negotiable.

A simple annual review, i.e. checking your allocation, rebalancing when needed, and tracking performance properly, can significantly improve your retirement outcome.