Indian pension funds have capitalised on the country’s stock market boom, posting a 36 percent one-year return on equity investments, according to the latest data from the Pension Fund Regulatory and Development Authority (PFRDA). The gains, fuelled by the bull run, also propelled National Pension System's (NPS) assets under management to Rs 12.65 lakh crore as of August, a 30 percent increase from a year earlier.
Over a three-year period, pension funds have achieved an average equity return of 18.6 percent. The NPS's average equity return stands at 14.26 percent since inception, underscoring the long-term potential of equity investments within the scheme.
Almost the entire equity returns are received by the pension holders with nominal charges to minimise impact on investor returns. Point of Presence (POP) charges are deducted upfront, while other administrative and fund management fees, averaging around 0.09 percent, are deducted before the Net Asset Value (NAV) is declared.
There is no automatic reduction in equity exposure, even after the age of 60 in case of NPS. Investors can maintain or adjust their equity allocation as per their individual preferences and risk tolerance.
The stock market's outperformance has been driven by optimism surrounding India’s long-term economic prospects, leading to positive sentiment from investors, global brokerage firm Jefferies had said. Despite recent volatility and concerns over first-quarter earnings and GDP growth slowing to 6.7 percent, many analysts remain confident about the country's economic trajectory.
Jefferies echoed this optimism, projecting that India will become the world’s third-largest economy by 2027, overtaking Japan and Germany. The firm attributes this to consistent GDP growth, favourable geopolitical conditions and ongoing reforms. Jefferies also predicted that India’s market capitalisation, currently valued at $4.5 trillion (making it the fifth-largest in the world), could reach $10 trillion by 2030.
“Continued reforms should maintain India’s fastest growing large economy status. Strong trends in domestic flows have reduced market volatility and decadal low foreign ownership offers valuation cushion. Return on equity-focused corporate sector with 167 companies having more than $5 billion market cap leave ample choices to investors,” wrote Mahesh Nandurkar, India equity analyst at Jefferies.
NPS assets and subscriber growth
The NPS may be one of the later entrants, but the retirement scheme has seen robust growth since its launch in 2004, with total AUM reaching Rs 12.65 lakh crore till August-end, which is a significant increase from Rs 9.65 lakh crore as on August 26, 2023.
PFRDA chairman Deepak Mohanty had on June 21 expressed confidence that the combined NPS and APY corpus could rise to Rs 15 lakh crore by the end of FY25. The government has announced that the new Unified Pension System (UPS) will be introduced from April 1, 2025.
Subscriber growth has also been notable, with 16.33 lakh new subscribers having joined the NPS from Aug 24, 2023 to Aug 24 2o24. The PFRDA is aiming for 11 lakh new enrolments from the private sector by the end of the fiscal year. Over the last one year, the "All citizens" segment saw 6.94 lakh new subscribers, while the number for the corporate segment was2.75 lakh. NPS' all citizens model is a voluntary retirement savings scheme that provides pension benefits to all working-class citizens. The corporate model is a customised version of the NPS that allows organisations to offer their employees the benefits of NPS.
As of August 24, the total number of NPS and APY subscribers stood at 7.70 crore, a 16.24 percent increase from 6.62 crore in the previous year, according to the PFRDA data.
Equity exposure in NPS
In the NPS, the level of equity exposure varies between Tier 1 and Tier 2 accounts. In a Tier 1 account, which is primarily focused on long-term retirement savings, the maximum equity exposure is capped at 75 percent. This limit is in place to balance growth potential with risk management over time.
On the other hand, a Tier 2 account, which functions as a more flexible investment option with no withdrawal restrictions, allows for up to 100 percent equity exposure.
The equity exposure in NPS is managed differently based on the choice of investment mode designed to lower risk as the investor approaches retirement. Under the 'Auto Choice' mode, the equity allocation automatically decreases after the age of 35. However, in the 'Active Choice' mode, the investor has full control over their asset allocation.
"The National Pension System (NPS) offers inflation-adjusted returns, making it a well-balanced tool for long-term retirement planning. With its diversified investment approach, NPS helps protect savings while aiming for steady growth. However, the NPS currently requires greater patience and awareness from investors to fully realize its potential," Ranbheer Singh Dhariwal, CEO, Max Life Pension Fund Management, told Moneycontrol.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
