Pension plans from insurers, public provident fund, mutual funds, annuity plans – confused about which retirement plan to buy? The national pension system (NPS) may be your best bet today, with extremely low costs, flexible options and returns that beat most other avenues.
Almost all the five fund managers who are currently offering the product have managed to deliver returns higher than benchmarks as well as competing avenues such as the PPF, employees’ provident fund (EPF) and debt mutual funds.
If you want to invest in the NPS, you basically decide to allocate your money in a chosen proportion across three ‘plans’: E – equity instruments, C – corporate fixed-income products, and G – government securities. You can set your own allocations for each fund you choose, with a maximum of 50 per cent allowed for the E option. The NAVs are declared for each plan separately.
Deciding best returns
Now, given that each of the five authorised pension fund managers offers all three plans, who has delivered the best returns in each plan?
Depending on who your manager is, the E Plan delivered 5-9 per cent returns compounded annually over the past four years, the C option managed 9.8-13.1 per cent, while the G option gave 9.2-12 per cent.
Barring the SBI Pension Fund’s performance in the equity portion, which failed to beat the Nifty, all other fund managers beat benchmarks across all three schemes and were ahead of standard benchmarks as well. ICICI Pru delivered the highest returns on the E or equity plan.
With respect to options C and G, all the fund managers delivered exceedingly good returns. They managed returns that are 2-3 percentage points ahead of representative indices such as the Crisil Composite Bond, Crisil Debt Hybrid and even the Crisil Balanced Index.
Returns across the NPS plans are a good 1-2 percentage points higher than those on popular assured return options such as EPF and PPF.
Low cost delivery
NPS also happens to deliver these returns while charging an extremely low fee for managing your money.
The charges work out to 0.6 per cent per annum on the value of assets over the period of your investments. For the first year alone, expenses would be 0.75-0.8 per cent as there are one time charges relating to account opening and subscriber registration. The annual maintenance charges and portfolio management expenses are capped by the Pension Fund Regulatory and Development Authority (PFRDA).
Here the NPS compares very well with alternative options. Balanced mutual funds which invest in both debt and equity usually charge 1.75-2.5 per cent a year. On unit-linked insurance products or traditional plans expenses are much higher. With NPS managers recently allowed to invest in stocks outside the indices, fund managers get more flexibility to invest actively and better the returns. NPS also scores over alternatives such as mutual funds or ULIPs on account of a stable corpus. There is no redemption pressure as investments are locked for very long tenures.
Which manager?
Analysis establishes that ICICI Prudential has delivered the best equity performance while most others have done well on debt. But what would an average investor in the NPS have made from his investments?
To arrive at the overall returns that NPS fund managers have delivered over the past four years, we made a few assumptions: The asset allocation pattern has been taken as E – 50 per cent, C – 30 per cent and G – 20 per cent. For investors less than 35 years of age, this is the recommended asset allocation pattern, with higher exposure to equity. This is also the same pattern as that given under the ‘auto choice’ option for subscribers aged 18-35 years.
On this assumption, the ICICI Prudential Pension Fund Management seems to be the best choice as it has performed well across all three options and has delivered an annualised return of 10.2 per cent over four years. Kotak Mahindra Pension too has done well, with 9.4 per cent returns.
ICICI Prudential, while investing in stocks mimicking the Nifty, has accorded higher weightage to names such as ITC, HDFC, HDFC Bank which outperformed. In its corporate debt portfolio, it has opted to take exposure to mainly AAA rated bonds and infrastructure bonds of companies such as Infotel Broadband and Reliance Ports.
The average maturity period of the portfolio is over eight years. The long maturity bets have helped the fund gain from bond price increases, but could entail some price risk. Kotak too has stocked up on long maturity corporate and Government debt. In its equity portion, investing partly in index funds and partly in direct equity, it has managed to beat the Nifty and the Sensex. The extent of out-performance however, is not as high as ICICI Pru, UTI and even Reliance. SBI Pension has lagged behind substantially on equity, but has done exceedingly well on debt. Reliance Pension, despite doing better than benchmarks, has lagged all its peers.
Overall, investors may opt for ICICI Pru as their first choice among managers. Kotak Mahindra may be the next choice with UTI in the watchlist. You can change your fund manager once every year. So, keep reviewing your fund manager’s performance with peers and with benchmarks and take corrective action, if necessary.