After 12 years of investing in the NPS my return is 8.9%

I have invested in the National Pension Scheme (NPS) since 8th March 2010. This is a performance report of how the NPS invested has fared over the last 12+ years. We also compare the returns with EPF.

Note: Kindly do not assume that I am recommending NPS instruments. My situation is quite different from most. NPS is a mandatory investment in my case and a full replacement for GPF. If you are in a corporate setup, please recognise that NPS has a lock-in of up to 60. Most corporate employees will not work until that age. If you exit before 60, 80% of your corpus will be locked into an annuity.

So our recommendation has always been not to invest in NPS. If you cannot see that “extra Rs. 50,000 tax saving go “waste”, then at least ensure you invest a lot more elsewhere!

Please note that my NPS corpus is about 49% of my equity MF corpus tagged to retirement. It is about 25% of my total retirement portfolio. It has taken a lifetime to reduce the dependence on NPS. For more details, see Fourteen Years of Mutual Fund Investing: My Journey and lessons learned.

I have been part of the NPS since 2006. However, the NPS was not ready for investment then. Until then, the organisation F&A held the money with 8% annual interest. The first investment into NPS funds was made on 8th March 2010.

We shall track the progress from that date. The money was almost equally divided among the three Tier 1 (central govt) schemes offered by UTI, LIC and SBI. The asset allocation was 15% equity and the rest 85% in bonds (mostly gilts).

NPS with employer contribution is one of the best step-up SIPs into a mutual fund. My monthly investment today is five times more than it was ten years ago. That is a 14% year-on-year increase in investments spanning two pay commissions and promotion. You can see that in the curvature of the total investment line below.

This is the growth of the NPS portfolio along with total investments. The XIRR as of 26th Aug 2022 is 8.95% (last year, it was 10%-ish, thanks to the rate hikes, the XIRR has dropped).

Notice the fall in July 2013. That is when RBI has to increase overnight rates by 2% to stop the fall of the Rupee. My gilt-heavy NPS portfolio took a mighty tumble. Again it has suffered for the last few months.

This is what the NAV looked like in Oct 2013. My NPS CAGR just before the fall was 11% ish, and overnight it became 6-ish%, recovering over the next few months. When this occurred, PFRDA realised, “Aisa bhi hota hai! What if this happens just before the person retires?!” and introduced staggered withdrawals.

Also, notice how the corpus reacted to the March 2021 crash. That is a combination of the 15% equity and gilts.

This is the cumulative gain so far.

NPS vs EPF

This compares the NPS NAV (the SBI central govt fund has been used as a representative) and the EPF NAV (constructed from annual interest rate history).

At the time of writing, NPS has outperformed EPF, but that may not always be the case! If I had invested in EPF instead of NPS ten years ago, the NAV evolution (assuming daily growth = annual interest/365) would look like this.

It is hard to beat the non-volatile growth of EPF but not too shabby for a mandatory investment! The asset allocation of central govt employees can now be modified. I have not changed it (and recommend others not to do it too). Using NPS as a pure-debt fund and managing equity separately is best (see links below)

Also read:

• Can I use NPS Tier II as a low-cost index fund?
• NPS equity schemes underperform Nifty, Nifty 100: time for passive approach?
• Why you should avoid equity (scheme E) in your NPS portfolio!