NPS equity schemes underperform Nifty, Nifty 100: time for passive approach?

Published: 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.

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 TRI5.56%
Nifty 50 TRI5.39%
ICICI Tier 1 E3.75%
Kotak Tier 1 E4.37%
UTI Tier 1 E3.97%
SBI Tier 1 E4.56%

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 TRI0.09%
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 TRI7.99%
Nifty 50 TRI7.43%
ICICI Tier E6.88%
Kotak Tier 1 E7.15%
UTI Tier 1 E7.47%
SBI Tier 1 E7.10%

NPS E Scheme Performance Ten years( May 2010 to May 2020)

Nifty 100 TRI8.22%
Nifty 50 TRI7.85%
ICICI Tier E7.47%
Kotak Tier 1 E7.47%
UTI Tier 1 E6.91%
SBI Tier 1 E7.20%

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?

  1. Avoid the NPS if you have a choice: EPF vs NPS: Should you shift to NPS because the govt wants you to?
  2. 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
  3. 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.
Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps