NPS Tier 1 Equity Scheme Performance vs Nifty 50 and Nifty 100

NPS Tier 1 Equity Scheme Returns Performance Report 2019

Published: September 7, 2019 at 11:42 am

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Here is how the NPS Tier 1 Equity Schemes (“E”) have performed since inception. Many mistakenly assume NPS equity schemes are index mutual funds tracking Nifty 50. A look at the scheme portfolios would immediately dispel that myth. The NPS E schemes hold close to 100 stocks.

Getting the historical NAV history of the NPS schemes is an exercise in of itself and I shall detail how painful this with missing links and unhelpful web formats in a video.  Kindly note that the following data/analysis is presented only for information. Regular readers may be aware that I am strongly opposed to the NPS. See: Do Not Invest Rs. 50,000 in NPS for additional tax saving benefit in 2019! Also: NPS has EEE (tax-free) Status! Here is why you should still not invest (ps. it is not exactly EEE, but that is how they like to portray it). If anything, these results will add one more reason for you to stay away from NPS!

NPS Tier 1 Equity Scheme Details

Date Source: NPS Trust Date: July 31st 2019

Pension Fund (PF)Assets (Crores)Inception Date
SBI PF2,506.0315-May-09
LIC PF572.5523-Jul-13
UTI PF386.5421-May-09
ICICIPF1,395.8418-May-09
Reliance PF97.8721-May-09
Kotak PF284.9715-May-09
HDFC PF2,333.4601-Aug-13
Birla PF47.8309-May-17

Notice that LIC, HDFC and Birla pension funds (PF) are quite new. The AUM here corresponds only to that of individual NPS subscribers. Govt, corporate and NPS lite AUM is held in separate funds.

NPS Tier 1 Equity Scheme Returns (as on 31 July 2019)

NPS Tier 1 Equity Scheme Returns as on 31 July 2019The benchmark used by NPS Trust seems to be only the NIfty 50 price index (not including dividends) but even that some NPS E schemes are trouble beating. The difference is a lot more than the expense ratio (which is advertised as lower than normal mutual funds!).

It is high time PFRDA makes NPS mutual fund schemes as plain index schemes!

 

Five year rolling return performance of NPS Tier 1 E Schemes

Let us now compare every possible five, seven and ten-year returns of these schemes with both Nifty 50 TRI and Nifty 100 TRI.

LIC Pension Fund Tier 1 Scheme E (5Y)

NPS LIC Tier 1 E scheme five year performance

Kotak Pension Fund Tier 1 Scheme E (5Y)

NPS Kotak Tier 1 E scheme five year performance

SBI Pension Fund Tier 1 Scheme E (5Y)

NPS SBI Tier 1 E scheme five year performance

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UTI Pension Fund Tier 1 Scheme E (5Y)

NPS UTI Tier 1 E scheme five year performance

Seven year rolling return performance of NPS Tier 1 E Schemes

UTI Pension Fund Tier 1 Scheme E (7Y)

NPS UTI Tier 1 E scheme seven year performance

SBI Pension Fund Tier 1 Scheme E (7Y)

NPS SBI Tier 1 E scheme seven year performance

Kotak Pension Fund Tier 1 Scheme E (7Y)

NPS Kotak Tier 1 E scheme seven year performanceThe performance is neither consistent nor inspiring confidence.

Ten year rolling return performance of NPS Tier 1 E Schemes

NPS Tier 1 E all schemes ten year performanceAlthough we have only 116 10-year data points (meaning we are looking at a short investment window), it is not exactly promising. The underperformance is more than that due to expenses. Is it because NPS pension fund managers are not as motivated (incentivised) as AMC fund managers?

Summary

You have seen the 5,7 and 10-year performance of NPS Tier 1 E schemes. Would you invest in such normal mutual funds? Would you lock in your money into such mutual funds just because the pension plan has an equity option and just because you get some extra tax benefit? Even if you want tax benefits, even if you have no choice regarding NPS at the very least choose a mix of G (govt bonds) and C (corporate bonds) and invest in equity elsewhere.

This is the reason, I will never change my NPS Central Government asset allocation of primary gilts with 15% equity. I am more than happy with my 9.69% annualized return since 8th March 2010. Yesterday, I have discussed creating the “ideal” retirement plan with income flooring! My aim is to ensure income flooring with the mandatory 40% annuity that I have to buy.

If the NPS E schemes were plain index funds tracking Nifty 50, there is cause to complain. They clearly are not such index funds. If PFRDA wants them to be active funds then they better use total return benchmarks, monitor performance and pull out fund managers who underperform. It would be better for everyone’s peace of mind if they were simple index funds.

 

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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.
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6 Comments

  1. Hi, nps investments have a tax advantage in the year of subscription – would be great if you did an analysis by tax slab (including the newly introduced surcharge impacts for incomes greater than 2 & 5 Crores).

  2. Which PFM is performing best to the investors aspirations as a whole?I am a new entrant in NPS and my goal is long term say about 35 years.Please suggest if possible.Also suggest for another case where the goal is of 10 years only,which PFM would be suitable?

  3. It will be better if above calculations are done agter considering additional tax rebate available inNPS under section 80ccd1(b).

  4. NPS currently does have some disadvantages vs. mutual funds. But I foresee that 20 years down the line, all equity related products might have the same treatment during withdrawal. Even PF’s might be taxed. So no point bothering about withdrawals when your term is over 20 years.

  5. The idea of linking investment products, which are explicitly linked to the objective of retirement, with passive indexation strategies is highly debatable. Please look up the research done by Mike Green and Steve Bregman with regard to how passive indexation is one of the next causes, or at least a contributory factor, to the current bubble in the US stock markets.

    Yes, the E schemes of NPS may be under-performing maybe because the managers are not motivated, or they are following some kind of smart-beta strategies (invest the whole corpus across 50 or 100 securities in equal amounts, etc.). But when it comes to my retirement money, I want some human being thinking on my behalf and not an approach that simply invests where the rest of the market does.

    Do not get me wrong: indexation is a great approach. But like everything when it is overdone it turns from a source of wealth creation to a wealth destruction. In India we have not yet begun indexation in any serious measure, but propagating it loudly is not advisable especially for a solution like NPS.

    In typical Indian fashion, I think NPS has its use along-side other products. It is neither good or bad in itself. It is an error to completely discard it as well as an error to only rely on it. But yes, for most individuals, who do not understand markets or investing, it is actually not a bad deal.

    One way to look at it is: Do not expect alpha-generation by NPS managers and do not expect them to even match the index (except an Index who does it anyway and even an Index after deducting costs does not) but definitely expect that they will follow some kind of beta strategy (i.e., the volatility of their portfolios will closely mirror that of the broader market). As long as you get that, it is a nice way to get a human-led beta strategy in your portfolio. If you want some kind of alpha or specific diversification or for anything else, look towards actively managed mutual funds.

    Focus on absolute returns and not relative. For most individuals to preserve some kind of purchasing power over a period of 20 to 30 years is a significant achievement. Whether they beat Index or not hardly matters. Any investment strategy has to be really tested in down-cycles, specifically with regard to how investors using those strategies behave .

    Always remember, passive indexation really took off in the U.S. in the last 20 years, and specifically, last 10 years in times of great quantitative easing by the Federal Reserve. History has not yet been written on it. So do not draw conclusions based on a very short time-window.

    Do your PPFs+EPFs+NPS+Mutual Funds. In the long-run a ‘thali’ approach will serve most people far better.

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