Last Updated on May 24, 2020 at 11:15 am
Considering how the NPS equity schemes have underperformed Nifty 50 and Nifty 100 total return indices, it is high time PFRDA mandates these “low cost” fund to passively track an index instead of classifying them as “active funds” that can invest in the Nifty, Nifty 100 universe.
The shift from passive investing to active investing for NPS funds was proposed in a 2015 report and implemented in Sep 2015 The reasons for such a move is not clear at least to this author. Concerns about this change were discussed in the leap blog in Oct 2015 by Ashish Aggarwal.
This implies at least for the last four years, an NPS scheme E (for equity) subscriber should expect some outperformance or at the very least on par performance with the Nifty 50 TRI or Nifty 100 TRI.
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NPS E Scheme Performance Four years( May 2016 to May 2020)
The base date is May 22nd 2020. HDFC PFM is not included in this study due to the difficulty in accessing its NAV history. Considering that 0.01% management fee that is a poor show. Or one could argue, if you pay peanuts for active performance, you get what you pay.
| Nifty 100 TRI | 5.56% |
| Nifty 50 TRI | 5.39% |
| ICICI Tier 1 E | 3.75% |
| Kotak Tier 1 E | 4.37% |
| UTI Tier 1 E | 3.97% |
| SBI Tier 1 E | 4.56% |
UTI Nifty 50 Index Fund with a TER 0.1% (ten times more than the above NPS schemes) managed to return 4.75%, If this is not an indication for the NPS schemes to go the passive route, I do not know what is.
NPS E Scheme Performance Three years( May 2017 to May 2020)
| Nifty 100 TRI | -0.27% |
| Nifty 50 TRI | 0.09% |
| ICICI Tier E | -1.98% |
| Kotak Tier 1 E | -1.51% |
| UTI Tier 1 E | -1.75% |
| SBI Tier 1 E | -1.31% |
Not a pretty picture at all. For this low a management fee, they are better off being a NIfty 100 index fund.
NPS E Scheme Performance Seven years( May 2013 to May 2020)
Amusingly when we include the period when they were “essentially a Nifty 50 index fund”, the outperformance margin reduces over seven and ten years (see below).
| Nifty 100 TRI | 7.99% |
| Nifty 50 TRI | 7.43% |
| ICICI Tier E | 6.88% |
| Kotak Tier 1 E | 7.15% |
| UTI Tier 1 E | 7.47% |
| SBI Tier 1 E | 7.10% |
NPS E Scheme Performance Ten years( May 2010 to May 2020)
| Nifty 100 TRI | 8.22% |
| Nifty 50 TRI | 7.85% |
| ICICI Tier E | 7.47% |
| Kotak Tier 1 E | 7.47% |
| UTI Tier 1 E | 6.91% |
| SBI Tier 1 E | 7.20% |
Investors interested in a rolling return story may consult: NPS Tier 1 Equity Scheme Performance vs Nifty 50 and Nifty 100
Citing the lack of clarity in investment and strategy and terrible trailing one-year returns, I had suggested Why you should avoid equity (scheme E) in your NPS portfolio! In response to this, I found an alarming number of investors seem to be “okay” with investing in a low-cost active fund that we know little about! I guess it does not matter as long as there “tax benefits”.
This makes it so much easier for the pension fund managers to happily underperform. I can only repeat what was said earlier:
What should investors do?
- Avoid the NPS if you have a choice: EPF vs NPS: Should you shift to NPS because the govt wants you to?
- If you do not have a choice (like me): minimise E scheme exposure as much as possible – ideally zero. Use a combination of gilts and corporate bonds. In my case, I have a default 15% E scheme exposure which I have left alone due to inertia. See: Ten years of investing in the NPS: Performance report
- Once PFRDA realises their folly and changes them back to index funds, you can reconsider your decision, provided there is space of “E” in your asset allocation.
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