National Pension Scheme - An Investment Vehicle

The National Pension System (NPS) which is regulated by Pension Fund Regulatory and Development Authority (PFRDA) was originally introduced by the Central Government in January 2004 and subsequently extended to the private sector in May 2009. So, for private sector, it is just 4 years old.

 As on May 7, 2013, the total corpus under NPS has now reached to Rs 32,567 Crore which is still 5% of total assets managed by Indian Mutual Fund Industry. NPS has a total of 50 lakh subscribers. But, private sector participation is still very low when compared with central and state government subscribers.

Advantages of investing in NPS:

• Less expense ratio

This scheme charges only 0.25% as the annual expense ratio which is very less when compared with other investment products

• Tax Efficiency

Contributions made by an individual, would be eligible for a maximum annual deduction of Rs1 lakh under Section 80C. However, this scheme comes under EET (Exempt-Exempt-Taxable) regime. Initial and additional contributions are tax-free but at the time of withdrawal, it is taxable.

 

Disadvantage of Investing in NPS

• Quality Fund Managers

The Indian securities market is yet to become efficient like developed markets which mean that active fund managers should outperform passive managers in long term. NPS with low expense ratio may not be able to tap the best fund manager for active management and may not incentivize the NPS Fund Manager to outperform the broader market.

• Liquidity

The NPS schemes offer very poor liquidity to investor which is a big hindrance. Investment products like Mutual Funds are highly liquid.

Performance of NPS Schemes:

Scheme	Asset Allocation - Approx	Returns (%)*
Central Government	Equity - 10% & Debt - 90%	12.39
State Government	Equity - 10% & Debt - 90%	13.00
Swavalamban	Equity - 10% & Debt - 90%	13.40
Private: Equity	Equity - 100%	8.38
Private: Corporate Debt	Debt - 100%	14.19
Private: Government Debt	Debt - 100%	13.52

            *For the financial year 2012-13

                **Source PFRDA and AMC websites

Performance Comparison Analysis:

1) Hybrid Category (10% Equity and 90% Debt)

Scheme	Asset Allocation - Approx	Returns (%)
NPS Schemes:
Central Government	Equity - 10% & Debt - 90%	12.39
State Government	Equity - 10% & Debt - 90%	13.00
Swavalamban	Equity - 10% & Debt - 90%	13.40
Average		12.93
Benchmark:
Crisil MIP Blended Index		9.06
Comparable Mutual Funds:
Birla SL MIP II Savings 5 Plan		9.15
Reliance MIP		9.25

NPS Schemes have outperformed both benchmark and comparable mutual funds.

2) Equity Category (100% Equity)

Scheme	Asset Allocation - Approx	Returns (%)
NPS Scheme:
Private: Equity	Equity - 100%	8.38
Benchmark:
Nifty		7.31
BSE 500		4.81
Comparable Mutual Funds:
Reliance Equity opportunities Fund		15.71
Birla Frontline Equity Fund		13.96
IDFC Premier Equity Fund		10.84
ICICI Discovery Fund		11.29

NPS Schemes have outperformed the benchmark but have underperformed comparable mutual funds.

3) Corporate Debt (100% Debt)

Scheme	Asset Allocation	Returns (%)
Private: Corporate Debt	Debt - 100%	14.19
Benchmark:
CRISIL Composite Bond Fund Index		9.24
Comparable Mutual Funds:
Birla Sun Life Income Plus		11.28
ICICI Income Plan		11.12
IDFC SSIF - Investment Plan		12.62

NPS Schemes have outperformed both benchmark and comparable mutual funds.

4) Government Debt (100% Debt)

Scheme	Asset Allocation	Returns (%)
Private: Government Debt	Debt - 100%	13.52
Benchmark:
Crisil 10-Yr Gilt Index		11.25
Comparable Mutual Funds:
Birla Sun Life Gilt - PF Plan		12.68
Reliance Gilt Securities Fund		12.54
IDFC G Sec Fund - Investment plan		14.89

NPS Schemes have outperformed the benchmark and most of the comparable mutual funds.