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NPS equity schemes deliver scanty returns, debt makes up for the losses

Five of the seven NPS schemes have underperformed the flagship multi-cap mutual fund (MF) schemes managed by their sister firms

Ashley Coutinho  |  Mumbai 

Pension
Pension

The National Pension Scheme’s (NPS) tier-I have delivered low-to-mid single-digit returns over the past year, and have underperformed their benchmarks. Kotak Pension Fund was the best performer in the equity category, with returns of 6.8 per cent for a one-year period, while LIC Pension Fund, with returns of 2.1 per cent, was the worst.

Active NPS managers follow a multi-cap strategy, with investments restricted to the top 150-200 stocks by market cap.

Five of the seven NPS schemes have underperformed the flagship multi-cap mutual fund (MF) schemes managed by their sister firms. The underperformance ranged from 1.3-6.9 per cent, if direct plans of the MFs are taken into account.

“Performance will improve going forward, as fund managers diversify their portfolios,” said a senior executive of a pension fund manager. NPS’ equity funds were passively managed earlier, with investments in Nifty and Sensex stocks. This changed in 2015, with the regulator allowing fund managers to invest in firms listed on the BSE or NSE with market cap of at least Rs 5,000 crore, and also traded in the derivatives segment.

A large universe of diversified equity MF schemes has also been underperforming its benchmarks over the past two years. Market observers attribute this to the large sums of money chasing too few stocks, and the impact of regulatory changes such as categorisation of schemes, and the introduction of total returns index in lieu of a simple price index.

NPS equity schemes deliver scanty returns, debt makes up for the losses

“The performance of NPS schemes is a bit disappointing, especially considering the low cost charged by these funds. That a select basket of stocks in the benchmark indices have done well in the past year should have, in fact, aided the performance of NPS schemes,” said Amol Joshi, a financial planner.

The fund management charge for NPS is 0.01 per cent of the assets managed. Equity MFs charge 1-2 per cent as expense ratio. The debt segment of the NPS seems to have compensated for the low equity returns over the past year.

Government bond plans have returned 17-18 per cent, while corporate debt plans have returned an average of 14.1 per cent over the same period.

Bond funds have benefited from the policy rate cuts. Since January, the RBI has slashed the repo rate four times, aggregating to 110 basis points. In August, the RBI reduced the benchmark lending rate by 35 basis points.

Returns for a portfolio comprising 50 per cent in equity and 25 per cent each in government and corporate debt schemes work out to be 10.4 per cent, for the past year.

First Published: Wed, October 02 2019. 21:08 IST
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