Many NPS subscribers make the mistake of looking at just the Equity Returns of NPS and trying to make an assessment of whether NPS is giving good returns or not. But only considering returns Equity Funds (Scheme E) of NPS in isolation can be misleading.
Let me explain why.
As you know, NPS offers two investment choices to its subscribers:
- Active Choice
- Auto Choice
I have written about NPS Active vs NPS Auto Choice in detail earlier. But here are the highlights which are important from this post’s perspective:
NPS Active Choice – In this you get to control the asset allocation between equity and debt. And under the NPS Active choice, the maximum equity that you can have in NPS is 75% (up to the age of 50). After that, the upper limit gradually tapers down to 50% by the age of 60.
NPS Auto Choice – In this, the asset allocation is controlled by NPS authorities and depending on which Life Cycle Fund is chosen, the upper cap on equity exposure is defined. So Aggressive Life Cycle Fund (Auto-LC75), the cap on equity is 75% till age 35 and then it goes down to 15% by the age 55. For the Moderate Life Cycle Fund (Auto-LC50), the cap on equity is 50% till age 35 and then it goes down to 10% by the age 55. And finally for the Conservative Life Cycle Fund (Auto-LC25), the cap on equity is 25% till age 35 and then it goes down to 5% by the age 55.
So given the above options, the maximum allocation that can go into equities in your NPS account is capped at 75% of the investment. The balance has to be compulsorily invested in debt (government bonds and corporate debt).
So for an NPS investor, looking only at NPS equity (Scheme E) returns in isolation is not the right way. In addition to equity returns (Scheme E), investors should also look at what returns have been delivered by the scheme G and scheme C.
NPS scheme E invests predominantly in equity instruments up to a maximum of 75%. The balance has to be compulsorily divided between NPS Scheme G (which invests into government securities) and NPS Scheme C (which invests into fixed income instruments of corporates).
So even if someone has maximum equity exposure at 75% (in scheme E), its obvious that remaining 25% NPS portfolio is parked in Scheme G and/or Scheme C. So returns earned by the overall NPS portfolio will be proportionate.
I was checking the returns of various NPS schemes in Tier 1. Here is how the NPS schemes of various Pension Fund Managers (PFM) have fared in recent years:
As is the nature of various assets, different assets give different returns in different time periods. And that is the reason why following proper asset allocation is so important when planning your retirement correctly.
Now let me highlight why only considering returns Equity Funds (Scheme E) of NPS in isolation can be misleading.
Suppose you are an NPS subscriber aged 38 who invests in NPS Auto Choice (Aggressive Life Cycle Fund – LC75) for his retirement.
Now if you check the NPS Aggressive LC75 Fund, then you will see that for age 38, the equity component (E) is capped at 63%, G at 24% and C at 13%. Here is a snapshot of the asset allocation table for NPS Auto choice Aggressive Life Cycle Fund for a 38-year old:
Let’s now pick a Pension Fund Manager at random and see what returns their 3 schemes (E, G and C) have generated. And let’s focus on the 3-year returns:
As you can see, in the 3-year period here, scheme E gave 14.57%, scheme G gave 6.07% and scheme C gave 7.65%. And since only 63% of your NPS was parked in scheme E, only that part of the corpus earned scheme E’s returns of 14.57%. The remaining scheme G (24%) earned 6.07% while money parked in scheme C (13%) got returns of 7.65%.
And this is the reason why you need to look at returns given by all the schemes where you NPS is investing and not just NPS’s equity scheme’s returns. Hopefully, this clears any doubt if you had about this aspect of NPS Portfolio Returns.
All said and done, remember that the NPS returns are not guaranteed. They are dependent on the performance of all the underlying assets, namely equity E, government securities G and corporate bonds C.
If you want to know more about various aspects of NPS, do check out the following detailed notes:
- What happens if you invest Rs 50,000 every year in NPS?
- Difference between NPS Tier 1 Vs NPS Tier 2 Account
- (Free Download) Excel-based NPS Maturity & Pension Calculator
- NPS Auto Choice Vs. Active Choice
- Latest (revised) NPS Exit & Withdrawal Rules
- NPS Tax Benefits & Maturity Taxation Rules (Updated)
- Don’t look at NPS Equity (Scheme E) Returns in Isolation. Here’s Why?
- NPS vs PPF: Which is better?