Private sector NPS subscribers can now invest up to 5% of their corpus in alternate investments, including REITs and InvITs among others.
Two years ago, the Pension Fund Regulatory and Development Authority (PFRDA) introduced a new asset class in the NPS.
Private sector NPS subscribers can now invest up to 5 percent of their corpus in alternate investments, including alternate investment funds (AIFs), real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), and so on.
However, the plans, or ‘A’ class of funds, have not really kicked off. The corpus managed under these plans is insignificant, with the combined assets under management (AUM) of all pension funds standing at less than Rs 5 crore. This is a fraction of the Rs 12,985 crore AUM of private sector NPS funds. HDFC Pension Fund has the largest corpus at Rs 2 crore. Other pension fund managers’ alternate investment plans have less than Rs 1 crore in assets—the minimum lot size needed for investment in any alternate investment vehicle. Since flows are low, most fund managers have parked these flows elsewhere. As Sandeep Shrikhande, CEO, Kotak Pension Fund, says, “Most pension fund managers are not in a position to deploy these flows in alternate investments.” Most of the money is temporarily parked in perpetual bonds offered by banks.
Not better than equities Alternative investment funds outperformed debt but have lagged equity funds Low AUMs and lack of products have prevented alternate investment funds in NPS from taking off. Data as on 20 April, 2018 Source: Value Research
As on 31 March, HDFC Pension Fund had invested around 70% of its alternate investment plan in these bonds with the rest in liquid funds and cash. ICICI Prudential Pension Fund holds around 89% of its scheme A allocation in perpetual bonds.
Sandeep Shrikhande CEO, Kotak Pension Fund says, “Given the low inflow into this category, most pension funds are not able to invest in alternate investments.”
The bonds are fixed income securities with no maturity date that yield a steady stream of interest income in perpetuity As far as performance is concerned, alternate investments have generated healthy returns. They have gained 7.5% on an average over the past year. The equity portion of NPS clocked nearly 15% return on an average, while returns from the government bond plan and corporate debt plan have averaged 3.5% and 5.1% respectively.
Pension fund managers says managing the alternate investment portion of NPS is a challenge. There is little awareness about alternate investments as it is not really a retail product. The asset class was introduced to give individuals a chance to participate in securities not typically accessible for retail investors. As it is not an automatic part of the NPS structure, investors have to actively ‘opt into’ the asset class. The products forming a part of alternate investments are relatively new concepts in India.
Sumit Shukla, CEO, HDFC Pension Fund, says, “Apart from marginal inflows, there is also a scarcity of assets available to invest in this space.”
REITs and InvITs— pooled investment vehicles that generate income from investment in properties and infrastructure projects—were introduced revcently. Only two InvITs— IRB InvIT Fund and Indiagrid Trust—have got listed so far while not a single REIT has been launched. Despite various relaxations, more listings have not taken place as they have failed to attract investors.
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Also, both listed InvITs have fared poorly. IRB InvIT Fund is trading 16% below issue price, while India Grid Trust is 2.6% below issue price. Both securities also suffer from poor trading volumes. Apart from REITs and InvITs, pension fund managers can invest in category I and category II AIFs. While AIFs in category I invest in SME funds, venture capital funds, infrastructure funds and social venture capital funds, AIFs in category II invest in private equity or debt funds.
Rules state pension fund managers can only invest in AIFs with corpus equal to or more than Rs 100 crore, and in instruments having a minimum rating of AA and above. Feroze Azeez, Deputy CEO, Anand Rathi Private Wealth, feels NPS investors can do without exposure to alternate investments. The track record of AIFs is not very healthy, he says, with equity funds performing far better than corresponding alternate funds.
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Azeez insists fund managers in India have low expertise in managing alternates, with their core expertise lying in equity and debt. Accessibility is the only positive for NPS investors opting for alternates. “With an investment threshold of Rs 1 crore, AIFs are for HNIs. Including these under the NPS umbrella makes them accessible for retail investors.” For now, investors in NPS would do well to ignore the alternate investments option and make the most of basic offerings.
