In India, there aren’t too many market-linked investments directed specifically for the purpose of retirement, for most people.
The National Pension System (NPS) truly fills this void with a simple and transparent structure.
As the NPS All-citizen model recently completed 15 years in operations, its assets have skyrocketed over the past decade. From just ₹365 crore in 2013-14, the all-citizen NPS has seen assets under management increase by over 178 times in the last 10 years to ₹65,023 crore as on June 30, 2024.
And the fund management charges remain very low — 0.09 per cent for the first ₹10,000 crore assets under management. Even if other transaction, maintenance and service charges are taken into consideration, the expenses are much lower than that for any other market-linked investment.
With a 15-year milestone behind it, a review of the performance of the Tier 1 NPS schemes — equity, corporate debt and government securities run by different fund houses — is in order, to help investors choose the best of pension funds.
Specifically, we assess the performance of NPS schemes over the past 10 years (July 2014 to July 2024). We also present the return scenario when equity, corporate debt and government debt are mixed in a hybrid set-up. We have ignored Scheme A (alternative asset funds) as it is yet to pick up significantly and the assets managed are still quite small.
Read on to take an informed call about the most suitable pension fund.
Setting out the methodology
Since the NPS entails regular investments over the years, we assume annual instalments are made in these pension funds.
Specifically, we assume that ₹1 lakh is invested in the first week of July of every year for a 10-year period.
Then, using the net asset value (NAV) and units accumulated over the years in the case of equity, corporate debt and G-Sec schemes of various pension fund houses, we calculate the XIRR (extended internal rate of return) percentage for the 10-year period. This is like calculating XIRR for an annual systematic investment in mutual funds.
The same exercise is done with the benchmarks. For equity funds, we have taken the Nifty 50 TRI as the benchmark.
In the case of corporate debt and G-Sec schemes, data on specific indices is not easily accessible.
Therefore, we decided to choose from among the top 5-star-rated mutual funds from bl.portfolio in the case of corporate debt. ICICI Prudential Corporate Bond fund was taken for comparing the performance of corporate debt schemes
In the case of G-Secs, SBI Magnum Constant Maturity was taken as a benchmark as it had a healthy track record in excess of 10 years, though there is no rating for the fund.
Only six pension fund houses have a performance record of more than 10 years. Schemes of SBI, UTI, LIC, ICICI Prudential, HDFC and Kotak have been taken for analysis.
Broad-based outperformance
The surprising aspect coming from the analysis of scheme performances is that almost all fund houses have done reasonably well across all the three categories, in the sense that they have mostly managed to beat the benchmarks over the 10-year timeframe on the basis of XIRR percentage.
In the case of equity funds (E), the six funds have delivered XIRR in the range of 15.46-16.78 per cent. UTI pension fund topped the charts with 16.78 per cent returns, followed by ICICI Prudential at 16.66 per cent. SBI recorded the lowest return over the 10-year period, but was still reasonable at 15.46 per cent.
The Nifty 50 TRI’s returns on XIRR basis over these 10 years stood at 14.36 per cent. Thus, all the equity schemes of all six fund houses beat the benchmark convincingly.
Though the returns of the schemes seem very close to each other, there is still a substantial difference when the current values of the schemes are taken. For example, the ₹10 lakh invested over 10 years in UTI’s equity scheme gave over ₹25.89 lakh, while SBI’s fund was worth a little over ₹23.88 lakh — nearly ₹2 lakh less than the former!
Small return differences make for substantial variation in corpus accumulation over longer periods of time (10 years or more). So, selecting funds merely on the basis of their beating the benchmark may not be enough.
With respect to corporate debt schemes, again, all the six schemes outperformed the ICICI Prudential Corporate Bond Fund’s 10-year XIRR.
HDFC topped the chart with 8.26 per cent, followed by ICICI Prudential at 8.03 per cent. Kotak’s scheme was relatively lukewarm, at 7.55 per cent, but still outperformed our benchmark, if only by a tiny margin of 1 basis point.
Here again, the difference in the value of the fund after 10 years between the best and worst performer is a substantial ₹62,514.
Finally, with respect to G-Sec schemes, ICICI Prudential came on top with 8.42 per cent returns, followed by HDFC at 8.27 per cent. LIC came at the bottom of the pack with just 7.06 per cent returns — the only scheme to underperform the SBI Magnum Constant Maturity fund’s 10-year XIRR of 7.83 per cent.
The difference in the fund value of the best and worst performer was a large sum of over ₹1.16 lakh.
Deciding the best
While analysing the individual category performance may be interesting, making overall sense could be challenging in terms of deciding the most suitable fund.
To simplify this process, we decided to make a hybrid fund-like structure with these NPS schemes.
So, we assumed ₹1 lakh would be split across the three categories as 50 per cent investment in equities, 25 per cent in corporate debt and 25 per cent allocation to government securities over the same 10-year period.
This split is not rigid, and investors can change allocations based on their personal preferences to the extent that the NPS allows.
A 50:50 equity-debt hybrid fund structure is what we envisaged as a generic case.
Based on this allocation pattern, ICICI Prudential came across as the best pension fund house with an XIRR of a little under 13 per cent, closely followed by UTI at 12.89 per cent and HDFC at 12.87 per cent.
These three pension fund houses can be considered by investors in the same order of preference.
For perspective, a benchmark with 50 per cent Nifty, 25 per cent ICICI Prudential Corporate bond fund and 25 per cent SBI Constant Maturity fund would have delivered an XIRR of 11.35 per cent over the July 2014 to July 2024 period.
If you prefer more debt and less of equity, the choice may still may not vary much and the same funds can be considered even in such cases.
Where do schemes invest?
In the equities portion, the universe of stocks where NPS funds could invest was restricted to the top 100 stocks. But it has been expanded to include the top 200 stocks, which means mid-caps are also allowed for investments. The condition is that all stocks must be part of the futures and options segments of the market.
However, most of the NPS funds restrict themselves to large-cap stocks from the Nifty 100 to Nifty 50 basket.
The familiar heavyweights of Reliance Industries, HDFC Bank, ICICI Bank, Infosys, TCS, L&T, HUL, ITC, among many others, figure in the portfolios of almost all the six fund houses.
And over the year, apart from just juggling around with the weightages, most of these stocks repeatedly find themselves in the holdings of every fund.
Thus, these funds have managed above-average returns without getting into too many risky bets.
On the corporate debt part, NPS funds are not allowed to take credit risk in their bond investments. So, most of these funds invest in debt securities that are rated AAA or AA for most part.
Bonds and non-convertible debentures of public and private sector companies figure in their portfolios.
IRFC, NABARD, SIDBI, NaBFID, NHAI, HDFC Bank, Axis Bank, Reliance Industries, LIC Housing Finance, NIIF Infrastructure Finance, Bajaj Finance, Power Grid, and REC are among the companies in whose debt securities these NPS funds invest in. Credit risk is minimal. The holdings are also diffused, with the top five holdings in most of these funds less than 20 per cent of the portfolio.
Finally, with respect to the government securities funds, again, there seem to be reasonable similarities in fund preference, though weightages differ.
NPS funds invest in government securities as well as state development loans (SDLs). A good part of the purchased G-Secs of the Central government are those maturing many decades from now. Some hold G-Secs maturing in 2064. In general, most funds have securities maturing 15-25 years away.
Even SDLs invested in are those maturing at least 10-15 years into the future. The average maturity of NPS government securities funds is a wide range. In the current environment, as interest rates peak out and bond inflows become heavy after India’s inclusion in global indices, yields may tend downwards on longer tenor government securities. This may result in a rally in bond prices propelling fund NAVs.
Across asset classes, NPS remains a moderate risk investment.
On the whole, apart from mutual funds, NPS investments are also very important in planning for your retirement.
And for those who work on contractual basis, the self-employed, small-business owners, etc. with no access to EPFO investments, NPS can be a great retirement vehicle and safety net catering to a wide range of risk appetites.