The National Pension System (NPS) is getting bigger. The pension scheme now manages over Rs.7.73 lakh crore of retirement assets of government and private sector employees. Four more asset managers—Axis Asset Management, DSP Investment Managers, Tata Pension Funds and Max Life Pensions—have recently been given certification for managing NPS assets. With the choice of asset managers growing from seven to 11, subscribers need to be discerning in their pick. After all, the NPS corpus at maturity would be a big part of an investor’s retirement kitty
The NPS as an investment vehicle has matured now with enough historical data to analyse performance. One can rely on established track record to decide which fund manager to pick or whether to continue with the same fund manager or not. Like in mutual funds, selecting the wrong fund manager can make a huge difference to returns. While NPS was a passively managed index-driven vehicle earlier, it is now actively managed. Its investment universe has expanded from only frontline index stocks to a basket including mid caps. Asset managers bring distinct investing styles and execution capabilities
Picking the right NPS fund is not as straightforward as choosing the best performing fund manager on the return chart. The charts often hide more than they reveal. While looking at point-topoint returns, your judgment can be coloured by market circ*mstances in that specific time period. Investors need to dig deeper. Is the fund manager delivering returns consistently? Is he taking on higher risk to deliver the return? Unfortunately, very little analytical data specific to NPS is publicly available. While mutual fund investors have access to a lot of tools to dissect fund performance, NPS does not enjoy similar analytical coverage. In this story, we delve deeper into the performance of NPS asset managers to help you make an informed choice.
The key differentiator
In the NPS, subscribers primarily have a choice of three types of assets—equities, government bonds and corporate bonds. They are allowed to choose the asset mix under the ‘Active choice’ option, subject to a maximum cap of 75% for equities. But subscribers have to pick one fund manager to manage all three asset classes, not a different fund manager for each asset class. So how to make the right choice? Dev Ashish, Founder, Stable Investor, remarks, “Your choice of fund manager in NPS should be driven by your preferred asset mix.” If you are leaning towards equities, go with a fund manager with a strong track record in equities. But if you are conservative, opt for a fund manager with proven capabilities in the bonds segment, insists Vidya Bala, Head – Research, Primeinvestor.in.
For aggressive or even moderate investors, it is the equity portion in NPS that will give the biggest boost to wealth creation. This also sees the biggest variation in return profiles among existing pension fund managers. Over the long run, even a small difference in return can translate into a big difference in final corpus. On a monthly NPS contribution of Rs.5,000 into a tier-1 equity plan, rising by 5% every year over 25 years, a 12% yield will fetch a corpus of Rs.1.29 crore. Another fund yielding 11% will fetch Rs.1.11 crore—a Rs.18 lakh gap in maturity value! Meanwhile, the fund manager choice in the government bond and corporate bond plan does not materially alter outcomes. This is why, unless you are ultra-conservative, pick a fund manager with a proven track record of execution capabilities in equities.
Digging deeper
Which pension fund managers boast better outcomes in equities? The right answer lies in looking beyond point-topoint returns. A rolling returns analysis for different time frames gives a more holistic picture. Rolling returns capture multiple instances of point-to-point returns over a longer period of time. It avoids getting swayed by performance in the most recent market phase. It helps gauge fund performance across multiple market cycles and different phases of a market cycle.
We have calculated 3- and 5-year annualised returns for every NPS tier-1 equity plan, rolled daily for the past 10 years. In other words, we calculated 3-year returns for all equity plans for every day since 2015 (covering periods 2012-2015, 2013-2016, right until 2019-2022). Also, we calculated 5-year return for all equity plans for every day since 2017 (this covers 2012-2017, 2013-2018, and so on until 2017-2022). We further compared these returns to the Nifty 50 TRI return for corresponding time frames. This allowed us to capture how the funds have fared relative to the index during this period.
So what are our findings? All NPS equity plans struggled to beat the index over both time frames. With 12.1% average 3-year rolling return, HDFC Pension Fund’s equity plan marginally beat the index return of 12%. The rest lagged the index. The story is similar for a 5-year horizon. All equity plans averaged lesser return than the index over 5 years. But the average return figure by itself does not reveal everything. We checked how many times the funds managed to beat the index over these time frames. This is more relevant as it shows the consistency in the fund’s ability to outperform.
NPS equity plans have lagged index across time frames
Rolling returns capture multiple instances of point-to-point returns over a longer period of time.
The above figures are calculated based on NAV data shared by Value Research. Benchmark index used is Nifty 50 TRI.
Returns are rolled daily over past 10 years, or since fund inception date as applicable, for 3- and 5-year time frames. All return figures in CAGR. Data as on 13 Sept
This metric reveals the true nature of the fund’s relative performance. On this count, HDFC Pension Management emerges the best among its peers in both 3- and 5-year time horizons. Yet, it has not been consistent in beating the index. HDFC Pension Management’s equity plan clocked outperformance 48% of times—barely half the number of observations— over both 3 and 5 year time frames. UTI Retirement Solutions’ equity plan has outperformed index 45% of the times over 3 years. It is followed by SBI Pension Fund and Kotak Mahindra Pension Fund outperforming 44% and 42% of the times.
ICICI Prudential Pension Fund has beaten index on 37% of the occasions. LIC Pension Fund has struggled the most, outperforming only 5% of times. In its relatively short life span, Aditya Birla Sun Life Pension Management—started in 2017—has beaten its index 6% of times over 3 year periods. Over 5 years, UTI Retirement Solutions is again next best after HDFC Pension Fund, beating the index 39% of the times. Offerings from SBI Pension Funds, Kotak Pension Fund and ICICI Prudential Pension Fund Management gave similar outcomes, outperforming in only quarter of the observations. LIC Pension Fund’s equity plan suffered the worst fate—it did not outperform on even a single occasion. ABSL Pension Management has also not beaten its index in its limited history.
It is also worth noting how the returns are distributed. This shows the probability of the fund fetching returns within a certain range. Over 3 years, plans of HDFC Pension Management and UTI Retirement Solutions look impressive, having delivered in excess of 10% return 75%, or three-fourth, of the times. But HDFC Pension Management’s plan also yielded 6% or lesser return on more occasions than others, barring LIC Pension Fund. Kotak Mahindra Pension Fund has managed greater than 10% return on 73% of the occasions, with offerings from SBI Pension Funds and ICICI Prudential Pension Fund Management achieving this feat 70% of times. LIC Pension Fund ranks poorest at both ends, fetching return in excess of 10% on least number of occasions and lesser than 6% on most occasions.
HDFC Pension Fund shines in equity & corporate bond segments
LIC Pension Fund has a superior track record in the government securities segment
Above figures are based on point-to-point returns only | Data as on 13 Sept | Source: Value Research
The 5-year return profile is somewhat different in this regard. Equity plans of UTI Retirement Solutions, SBI Pension Funds, Kotak Mahindra Pension Fund and ICICI Prudential Pension Fund Management are at par, yielding favourable outcome of greater than 10% return 75% of the times. HDFC Pension Management’s equity plan has achieved this feat on fewer occasions (65% of times) over a 5-year horizon. But what has aided its overall superior return profile is that it has clocked return in excess of 15% the most number of times. Subscribers of LIC Pension Fund have tasted higher than 10% return only in 61% observations. However, it is pertinent to note that LIC Pension Fund’s equity plan has ranked top of the performance charts for the years 2021 and 2022 (year-to-date).
What risks have they taken?
Don’t just consider returns. It should be seen in the context of the risk taken to deliver the return. Volatility in the fund return, as measured by its standard deviation, captures this to some extent. The difference in volatility among the existing equity NPS plans is quite modest. Even so, for the past 3 years, SBI Pension Funds’ equity plan has shown least volatility. Kotak Mahindra Pension Fund’s offering has exhibited the highest volatility among peers. SBI Pension Funds has again displayed least volatility over the past 5 years, even as ICICI Prudential Pension Fund Management’s offering has exhibited highest volatility.
There is not much variation in SIP returns of NPS plans
Monthly SIP contributions of Rs.5,000 have yielded similar returns among funds across asset classes.
Data as on 13 Sept | Source: Value Research
To capture the risk-adjusted return, we have considered each fund’s Sharpe Ratio. This metric measures the excess return delivered against the volatility experienced for fetching that return. HDFC Pension Fund’s equity plan is placed most favourably among its peers, over both 3 and 5 years. Meanwhile, LIC Pension Fund’s offering has fetched the least riskadjusted return over the past five years.
Which fund manager?
The above figures give a clearer picture on how NPS fund managers’ performance has shaped up. Clearly, NPS equity plans have not done a stellar job, even with its very low-cost structure. Simply buying the frontline index would have yielded better outcomes on most occasions. “Having a large cap tilt in the portfolio (all equity plans have 90% or higher allocation in large caps) has worked against the funds,” observes Rushabh Desai, Founder, Rupee with Rushabh Investment Services.
The above figures are calculated based on NAV data shared by Value Research | Data as on 13 Sept 2022
However, what still works in favour of NPS is its asset allocation focus and forced savings mechanism. Abhishek Gupta, Founder and Chief Financial Planner, Moat Wealth, asserts, “NPS forces a savings habit on investors, and ensures persistency over the long run. Even if its equity segment underperforms the index, the presence of other asset classes contributes to a healthy overall return.” It is also the only product that facilitates post-retirement income via mandatory annuitisation, says Ashish.
Subscribers would do well to stick with fund managers that deliver consistently over the long run. HDFC Pension Fund’s equity plan ranked top of the charts for only one calendar year since 2013, but its consistency has put it on a stronger footing.
The above figures are calculated based on NAV data shared by Value Research | Data as on 13 Sept 2022
Avoid switching between fund managers at every turnover in the performance charts. NPS allows this switch once in a year, at no cost or tax incidence for the subscriber. LIC Pension Fund’s chart-topping performance in its equity plan in the last two years may tempt you to switch. But don’t be in a rush. Desai insists, “Every fund is bound to go through phases of outperformance and underperformance. Investors should stick with fund managers who deliver consistently over market cycles.”
Review your NPS fund’s performance every three years. Do not compare funds based on short term returns of 6-12 months. The chosen fund need not be among the best performing funds for that period either. Even if it is delivering slightly lesser return but is fairly consistent in its outcomes, it is best to continue with the same fund. Bala avers, “Marginal underperformance should not worry you. Switch out from current fund manager only if the gap widens over long term.”
Keep an eye on the funds’ performance in the corporate and government bond plans. HDFC Pension Fund has ranked top of the charts among corporate bond plans for the past 3 and 5 years. In the government bonds segment, LIC Pension Fund outscores its peers.
Finally, avoid the newer pension fund managers for now. Let these establish a minimum 3-year track record and prove their execution capabilities first.
