Corporate debt, govt bonds improve returns of National Pension Scheme

The National Pension Scheme’s (NPS’) tier-I equity plans have delivered high single-digit to low double-digit returns over the past year, beating several categories of equity mutual fund schemes. Returns from government bonds and corporate debt were even higher, pushing overall returns for investors.


Government bond plans returned 13.6 per cent on an average, nearly 3.4 percentage points higher than the 10.2 per cent delivered by equity schemes. Corporate debt plans returned an average of 10.9 per cent over the same period.


Kotak Pension Fund was the best performer in the equity category, with returns of 12.2 per cent for a one-year period, while LIC Pension Fund, with returns of 8.1 per cent, was the worst.


Average returns for equity schemes have improved in the last quarter of 2019 afterthe market rally that began in September.


Active NPS managers follow a multi-cap strategy, with investments restricted to the top 150-200 stocks by market cap. Returns have beaten several diversified equity mutual fund schemes, including the multi-cap (average return of 9.6 per cent), large & mid-cap (7.9 per cent), mid-cap (2.9 per cent) and small-cap (-1.2 per cent) categories.


A large universe of diversified equity MF schemes has also been underperforming its benchmarks over the past two years.


Market observers attribute this to the large sums of money chasing too few stocks, and the impact of regulatory changes, such as categorisation of schemes, and the introduction of total returns index in lieu of a simple price index.


The NPS’ equity funds were passively managed earlier, with investments in Nifty and Sensex stocks.


This changed in 2015, with the regulator allowing fund managers to invest in firms listed on the BSE or the NSE with market cap of at least Rs 5,000 crore, and also trading in the derivatives segment. According to experts, performance will improve going forward, as fund managers diversify their portfolios.


“The cost differential of 75-100 basis points between MFs and the NPS has helped the latter’s cause. MFs have also lost out because of the acute polarisation of stocks in the past year,” said Amol Joshi, founder, Plan Rupee Investment Services. “The capital gains on account of the 135 basis points rate cut last year, on the other hand, has boosted the NPS’ debt portfolio.”


The fund management charge for the NPS is 0.01 per cent of the assets managed. Equity MFs charge 1-2 per cent as expense ratio. In the past year, the RBI slashed the repo rate five times, aggregating to 135 basis points. In August, the RBI reduced the benchmark lending rate by 35 basis points. Bond prices and interest rates move inversely.


Average returns for a portfolio comprising 50 per cent in equity and 25 per cent each in government and corporate debt schemes work out to be 11.2 per cent for the past year.

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