Best in class: How NPS funds have rewarded investors

Investors in the National Pension Scheme (NPS) have reason to smile: the government-favoured, low-cost retirement scheme has turned out a tidy performance — across major asset classes, time periods and fund managers.

In the equity category, NPS funds invest mostly in large-cap stocks. The seven Tier I funds that have been in existence for more than a year delivered 22-26 per cent returns last year. This is at par with or higher than returns from the Nifty 50 (21 per cent) and Nifty 100 (23 per cent).

In corporate debt, the 10.5-11.5 returns offered by NPS funds over the past year are better than the 10 per cent average returns of debt mutual fund (income) schemes. Similarly, the 10.5-13 per cent returns last year of NPS funds in government bonds are comparable with the average 12 per cent returns of mutual fund gilt schemes.

Clearly, NPS funds have capitalised on the strong run last year in both the stock and bond markets.

But the alternative investment category — the new asset class in NPS allowed from November 2016 with a limit of 5 per cent of the corpus — has got off to a slow start. On average, the funds have managed an absolute return of just about 3 per cent (or about 6 per cent annualised) over the past six months in this category.

Over the long term, too, NPS funds have done quite well across the major asset classes.

In the past five years, the five funds in operation have given an average annualised return of about 16 per cent in equity — better than or similar to the returns of the Nifty 50 and Nifty 100 (14-16 per cent).

So was the case with NPS returns in government bonds (10.5 per cent) and corporate debt (about 11 per cent) vis-à-vis comparable debt mutual funds (9-10 per cent).

Besides, the tax break on NPS Tier I investment (up to ₹2 lakh a year) renders their effective returns even more attractive.

The youngest NPS fund on the block, managed by HDFC Pension, was the top performer in equity over the past year.

Another relatively young fund, launched by LIC in July 2013, has some catching up to do with its peers on the equity front; its one-year return, at about 22.5 per cent, is the lowest in its peer set.

Over the long run, the NPS fund run by ICICI Prudential has topped the charts across asset categories – with a five-year annualised return of 16.6 per cent in equity, 11.4 per cent in corporate debt and 10.6 per cent in government bonds.

The gap between the best and worst NPS performers over five years is narrow in government bonds (about 20 basis points annualised) but is higher (about 70-80 basis points annualised) in equity and corporate debt.

Earlier, the stocks that NPS funds invested in had to be part of the Sensex or Nifty indices. But in 2015, funds were allowed to invest in stocks with market capitalisation of ₹5,000 crore or more and on which derivatives are available.

While the portfolio has expanded, the chunk of the equity portfolio being managed by NPS funds is in large-cap stocks.

Most of the corporate bonds held by NPS funds have the highest AAA rating, with a few AA+ and AA instruments. Government bonds in the NPS portfolios are mostly long-term, with a maturity of 10 years or more. This helped drive up gains when bond yields fell last year.