Last Updated on October 1, 2023 at 8:35 pm
The NPS has a portfolio management fee of 0.01%. There is an additional custodian fee of 0.0032% and various transaction fee applicable on the investment amount (much like an airline charging extra for the seat, leg space and food). Nonetheless, a fee of 0.01320% is not only enticing but also leads one to assume we would be investing in an index fund at least in the equity scheme (type E). Is it the case? Here is why you should not include any equity in your NPS.
At 0.01%, the NPS fee is comparable to that of the Bharat 22 ETF. A Nifty ETF is five times more expensive. A Nifty index fund is ten times more expensive. So it is natural to assume, “if invest in NPS E scheme, we would be investing in a low-cost index fund”.
First of all, what is the benchmark index for the E scheme? Even basic information like this is hard to find! Let us assume it is either Nifty 50 or Nifty 100. It is quite easy to check if a fund is tracking the index or not. According to the April 2020 factsheet, the NIfty 50 holds 11.54% of Reliance Industries and 10.56% of HDFC Bank.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
UTI Nifty 50 Index fund holds 11.56% of RIL and 10.58% of HDFC Bank. HDFC Nifty 50 Index fund has 11.54% and 10.56% of these stocks respectively. Not bad at all.
According to the April 2020 factsheet of SBI Pension Fund, it is Tier 1 Scheme E has 7.74% of HDFC Bank and 7.75% of RIL. Maybe it is tracking the NIfty 100? No, because the fund has only 61 stocks (should have pointed this out first, but counting stocks in a PDF file is hard)
Now, the NPS Trust released return data regularly but does not mention what the benchmark is! After looking at the returns of 228 indices, the closest match I could find to the 1-year return shown below is S&P BSE Sensex 50 – TRI.
| Pension Fund | Returns 1 Year |
| Birla Sun Life Pension Management Ltd. | -13.76% |
| HDFC Pension Management Co. Ltd. | -14.80% |
| ICICI Pru. Pension Fund Mgmt Co. Ltd. | -18.04% |
| Kotak Mahindra Pension Fund Ltd. | -16.29% |
| LIC Pension Fund Ltd. | -19.64% |
| SBI Pension Funds Pvt. Ltd | -17.29% |
| UTI Retirement Solutions Ltd. | -17.89% |
| Benchmark Return(?) as on 15/05/2020 | -16.56% |
However way we look at it, the NPS E Schemes are not index funds! They are low-cost actively managed funds and that is precisely the reason why you should not invest in them.
If you want proof over longer periods of time, check NPS equity schemes underperform Nifty, Nifty 100: time for passive approach?
The NPS is a close approximation to a black box. The investment strategy is either unknown or hard to locate; The same for the scheme benchmark. Historical NAV is hard to source; Some pension fund manager sites like LIC give an error when you try to access; The whole framework is a complete mess.
Under these operating conditions, the PFRDA would be better off with a simple index fund instead of going the active way and not paying the firms enough for it! Investing in a low-cost active fund with an unknown strategy is a terrible idea. They simply do not have the incentive to outperform especially when there is no star rating to worry about and no one is really looking closely.
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
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will 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
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and 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 300 (instant download)