NPS Equity funds shine, but struggles to beat broader indices
A Moneycontrol rolling return analysis on the NPS data available from the Handbook of NPS Statistics (2023) shows that all the Tier – 1 equity schemes struggle to beat the Nifty 100 – TRI while the Tier – 1 Corporate bond schemes and Government securities schemes comfortably beat the relevant categories of mutual fund counterparts
The National Pension Scheme (NPS) has gradually become popular with savers and investors as a good vehicle to plan for your retirement. The choice of assets (Scheme – E for equity, Scheme – C for corporate bonds, Scheme – G for government securities and Scheme – A for alternative investments), an additional voluntary- and more flexible- account on offer (Tier – II) and a compulsive annuity (in part and mandatory) makes it a compelling choice. But a Moneycontrol rolling return analysis on the historical NAV data sourced from the Handbook of NPS Statistics (2023) shows that all the equity schemes provided under Tier – 1 account struggle to beat the Nifty 100 – TRI. We calculated 5-year rolling returns from the last ten years’ NAV history. Only six pension funds that are with around 10 years track record were considered for the study. Here are the takeaways:
2/5
Equity schemes (Scheme - E) Performance as measured by the 5-year rolling return shows that all the equity schemes (under Tier – 1) managed by pension managers underperformed the broader market index Nifty 100 total return index. Equity schemes managed by HDFC pension, UTI pension and Kotak pension topped the chart. These schemes chose to invest about 90% of their portfolio into the largecap stocks from the permitted universe of top 200 stocks by market capitalization. Only about 5-10 percent of the portfolio were allocated to midcap stocks in most of these schemes. This is despite the fact that they have leeway to allocate more towards midcap stocks. One of the other reasons for the underperformance is less active on churning as most of them are prefer to buy and hold.
3/5
Corporate debt schemes (Scheme – C) Interestingly, all the corporate debt schemes managed by these pension funds outperformed the category average of Corporate bond funds managed by the mutual funds (in terms of 5-year rolling return). HDFC pension, ICICI Prudential pension and SBI pension topped the chart. These funds invest primarily in the top rated debentures issued by the public and private sector enterprises. Allocation to the bond rated below AA- is almost nil. These funds are less aggressive on taking duration calls. For instance, the portfolio Modified Duration of these schemes managed by HDFC pension, SBI pension and UTI pension as of April 2023 was 3.5 years (4.3 years same period last year), 4.1 years (4.1 years) and 4.5 years (4.6 years) respectively.
4/5
Government bond schemes (Scheme – G) Government bond schemes (Scheme – G) offered by pension managers delivered better returns and comfortably outperformed the gilt category of the mutual funds. LIC pension, HDFC pension and SBI pension were the top performers. These schemes mainly invest in the government securities and state development loans. As per the latest data, the portfolio Modified Duration of these schemes were ranging 5-8 years. Most of them are less aggressive on taking duration calls.
Alternative investments funds (Scheme – A) Introduced in 2016, Alternative investments funds can invest in the financial instruments such as Alternative investments funds (AIFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs) and Basel III Tier 1 bonds. Most NPS managers have made significant investments in debentures issued by public and private sector companies, Additional Tier (AT1) perpetual bonds, REITs, InvITs. But, NPS fund managers hardly invested in the AIFs mainly due to higher ticket size, illiquidity and stringent valuation methodology. Currently, one can expect returns from these funds similar to short term debt mutual funds. As far as the rolling return performance is concerned, SBI pension, HDFC pension and LIC pension funds were the top three performers.
