NPS investments are mutual fund investments!

Published: December 7, 2015 at 2:44 pm

Did you know that when you invest in the national pension scheme (NPS), you are actually investing in mutual funds? The NAV would be as volatile as any old equity or debt mutual fund and returns are not guaranteed. I was surprised that many thought the NPS investing is different from mutual fund investing. Hence this post.

This post is not an advertisement for investing NPS. Do Not Invest Rs. 50,000 in NPS For Saving Tax!

First it is important to recognise the difference between a defined benefit pension plan  and a defined contribution pension plan.

In a defined benefit pension plan, your pension depends on last drawn pay and experience. It will increase twice a year when the government announces DAs and once a decade with pay commissions.  When the government realised that these plans were a guaranteed way to empty its coffers, it decided to introduce the defined contribution plan.

In this case, only the monthly contributions are fixed. The contributions are pooled together and invested in a variety of equity and fixed income security by an asset management company via a fund management team. The subscriber gets units in exchange for the amount subscribed.  The number of units offered depends on the net assest value of the NPS fund pooled. All the securities are marketed to market. That is their value is the value traded in the stock market or bond market. Sounds familiar?

The PFRDA – pension fund regulatory and development authority is the regulator for NPS. The equivalent of SEBI for mutual funds.

The CRA – central recordkeeping agency maintains transaction record just like CAMs or KARVY does for mf AMCs.  That is, they are the registrar and transfer agents.

Subscribers register and invest in NPS via POPs or points of presence. They are the equivalent of distributors. They will receive a commission of 0.5% of amount invested.

On can also invest online in NPS directly via CRA. This is like the direct mutual fund plan.  In either case, there is a transaction charge for the NPS investments. This does not apply to ‘normal’ mutual funds.

Axis is the trustee bank for NPS. They take custody of all the amount subscribed, which will be managed by pension fund managers.

Many established mutual fund AMCs have a separate AMC wing dedicated to the NPS. SBI, UTI and LIC manage the subscriptions of government employees.  SBI, UTI, LIC, ICIC, Kotak, Reliance and HDFC manage the corpus of corporate and individual subscribers.

Stock Holding Corporation is the custodian for the investment instruments.

The custodian and the trustee report to the NPS Trust, which in turn reports to PFDRA.

When a subscriber withdraws money, CRA would instruct the trustee bank to transfer money to an annuity service provider (min 40%) and rest to the subscriber.  Annuity service providers are life insurers like LIC, SBI, ICICI etc.

In the case of ‘normal’ mutual funds, each AMC would have their own custodian, RTA, trustee bank and trust.



NPS-architecture. Source: NPS Trust

Volatility guaranteed, returns not guaranteed

NPS invest in three asset classes:

E for equity = Nifty stocks.

G for Government bonds

C for short-term corporate bonds

Read more: National Pension Scheme (NPS): Returns generated by Pension Fund Managers

Therefore, all securities in the NPS folio is either valued on daily basis in the stock market or bond market.

All government employee portfolios like mine have only 15% equity and about 20% of corporate bonds. The rest is long-term government bonds.

Look what happened to it in July 2013 when the RBI increased short-term interest rates by 2% overnight to control rupee depreciation.







The return (XIRR and not CAGR as mention in the graph) dropped from 11.6% to 6% sharply. It is now about 10% and it took months and months to recover. My National Pension Scheme Performance – Aug 2015.

If you want to find out recent performance of all three assest classes (managed by HDFC), you can do so here: HDFC Pension – Historic NAV values

Do not assume that just because NPS is offered by the government it is safer. It is not. Do not assume just because it is has a lock-in and annuity clause it is ‘different’.

NPS investments are mutual fund investments!

 Here is a NPS Calculator: How the National Pension Scheme works

Update 2:  NPS: Partial Withdrawal Rules 2016 are just awful! Beware.

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