Why you should avoid equity (scheme E) in your NPS portfolio!

Published: May 22, 2020 at 10:37 am

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.

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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 FundReturns
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?

  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
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