Best performing NPS funds for different asset allocations

Though it was thrown open to the public eight years ago, investors started showing interest in the National Pension System (NPS) only two years ago. Almost 80% of the 4.39 lakh voluntary subscribers joined the scheme only in the past two years. Also, 75% of the 5.85 lakh corporate sector investors joined NPS in the past four years. Clearly, these investors have been attracted to the NPS by the tax benefits offered on the scheme. Four years ago, it was announced that up to 10% of the basic salary put in the NPS on behalf of the individual would be tax free. The benefit under Sec 80CCD(2d) led to a jump in the corporate NPS registrations. The number of subscribers shot up 83%: from 1.43 lakh in 2012-13 to 2.62 lakh in 2013-14.

Then two years ago, the government announced an additional tax deduction of Rs 50,000 under Sec 80CCD(1b). The number of voluntary contributors shot up 148% from 86,774 in 2014-15 to 2.15 lakh in 2015-16. It turned into a deluge after the 2016 Budget made 40% of the NPS corpus tax free, with the number of subscribers in the unorganized sector more than doubling to 4.39 lakh in 2016-17.

These numbers are as encouraging as they are worrying. They indicate that tax savings, and not the product features, define the flow of investments in India. This is also the reason why investors blindly buy low-yield life insurance policies every year, unmindful of the poor returns earned from these plans.


The tax benefits have generated a lot of interest in the NPS. But many investors are not able to decide which pension fund they should invest in. The problem is further compounded by the fact that the NPS investments are spread across 2-3 fund classes. So, we studied the blended returns of four different combinations of the equity, corporate debt and gilt funds. Ultra-safe investors are assumed to have put 60% in gilt funds, 40% in corporate bond funds and nothing in equity funds. A conservative investor would put 20% in stocks, 30% in corporate bonds and 50% in gilts. A balanced allocation would put 33.3% in each of the three classes of funds while an aggressive investor would invest the maximum 50% in the equity fund, 30% in corporate bonds and 20% in gilts.

Also Read: How to open an NPS account online

Tax benefits have attracted investors to NPS…

… but investment is still very low

We hope our cover story will help you zero in on the best performing pension fund. There is also a step-by-step guide on page 4 to help you open an NPS account online. Happy investing.

For more, check top-performing NPS schemes (Option G) in our new NPS page

ULTRA SAFE INVESTORS
Portfolio mix
Corporate bond funds: 40%
Gilt funds: 60%

Bond funds have not done very well in recent months. The average G class gilt fund of the NPS has given 0.55% returns in the past six months. The change in the RBI stance on interest rates pushed up bond yields significantly in February, which led to a sharp decline in bond fund NAVs. Before they hit a speed bump, gilt and corporate bond funds had been on a roll. A series of rate cuts in 2015-16 was followed by demonetisation, which caused bond yields to crash and pushed up the returns of gilt and corporate bond funds.

Risk-averse investors who stayed away from equity funds and put their entire corpus in gilt and corporate bond funds have earned rich rewards. The average G class gilt fund of the NPS has generated over 12% returns in the past one year. Unsurprisingly, the LIC Pension Fund is the best performing pension fund for this allocation. “Team LIC has rich experience in the bond market and is perhaps the best suited to handle bond funds,” says a financial planner.

The gilt funds of NPS usually invest in long-term bonds and are therefore very sensitive to interest rate changes. Going forward, the returns from gilt and corporate bond funds will be muted compared to the high returns given in the past.

How pension funds performed

For more, check top-performing NPS schemes (Option C) in our new NPS page

CONSERVATIVE INVESTORS
Portfolio mix
Equity funds: 20%
Corporate bond funds: 30%
Gilt funds: 50%

In the long term, a 100% debt allocation is unlikely to beat inflation. This is why financial planners advise that at least some portion of the retirement corpus should be deployed in equities. Conservative investors in the NPS, who put 20% in equity funds and the rest in debt funds, have also earned good returns. Though the short-term performance has been pulled down by the debt portion, the medium- and long-term performances are quite attractive.

Here again, LIC Pension Fund is the best performer because 80% of the corpus is in debt. The fund has generated SIP returns of 10.25% in the past three years.

NPS funds for government employees also follow a conservative allocation, with a 15% cap on equity exposure. These funds have also done fairly well, beating the 100% debt-based EPF by almost 200-225 basis points in the past five years. Incidentally, the LIC Pension Fund for Central Government employees is the best performer in that category. Debt-oriented hybrid mutual funds, also known as monthly income plans or MIPs, have given similar returns during this period.

Also Read: "NPS investors should be able to gradually withdraw corpus"

However, this performance may not be sustained in future. The equity markets could correct and the debt investments might also give muted returns.

Read More: Top-performing NPS schemes (Option G) in our new NPS page
How pension funds performed

For more, check top-performing NPS schemes (Option E) in our new NPS page

BALANCED INVESTORS
Portfolio mix
Equity funds: 33.3%
Corporate bond funds: 33.3%
Gilt funds: 33.3%

How pension funds performed

AGGRESSIVE INVESTORS
Portfolio mix
Corporate bond funds: 30%
Gilt funds: 20%
Equity funds: 50%

How pension funds performed