Steady returns from NPS

While the returns have been around market expectations, investors should continue looking at investing here for the long haul

The National Pension System (NPS) isn’t the first product that comes to mind when one thinks of retirement solutions. However, NPS has generated returns that are a tad higher than the risk-free rate of the Public Provident Fund (PPF). Average returns on all fund houses have ranged between 7.6 per cent and 8.6 per cent in the past four years since the returns have been made available, according to Value Research data. Returns from PPF stand at 8.7 per cent.

Pension fund managers have largely gained from the elevated levels of interest rates. Returns from the corporate bonds category have been 9.69 per cent since May 2009. However, government securities have lagged at 6.84 per cent. Equity returns were benign at 7.13 per cent as the stock market lagged in performance since May 2009. The Sensex returned 81 per cent during the same period.

There have been differences in individual pension funds performances, with ICICI and SBI pension funds leading the pack. ICICI gave investors a return of 8.63 per cent, while SBI Pension Fund returned 8.02 per cent since 2009. Kotak Pension Fund, UTI Retirement Solutions and Reliance Pension Fund have made returns of 7.94 per cent, 7.65 per cent and 7.20 per cent, respectively.

NPS’ cumulative returns since 2009 across all its asset categories is near conventional levels and in line with market-linked products, say experts. Nevertheless, a five-year tenure is too short a time frame to evaluate the NPS. Says Dhirendra Kumar, chief executive of Value Research, “It's too premature to talk about NPS' returns because it's a new product. One shouldn't judge it on the current returns, as it's a long-term retirement product with equity component, which will take time to return."

NPS is tailored as a retirement product and pension fund managers are conservative in their underlying asset selection, as they target long-term returns.

As NPS is a market-linked product, any changes in the value of an underlying investment gets quickly reflected in the returns of investors.

Prateek Pant, head of credit products and services, RBS Private Banking, says: “NPS is a good product. The basic idea of NPS is to help an individual accumulate wealth till he retires, unlike a PPF, where withdrawals are allowed from the seventh year onwards, which can disrupt disciplined investments.” Since it has an equity component, it will help you accumulate wealth for retirement and beat inflation, which debt cannot, he said.

Other pension products have generated lower returns. “Unit-linked pension products have not given more than a seven per cent till now. And traditional ones return just about 5.5 per cent to six per cent a year,” said an insurance broker.