Despite the recent correction, stock-linked NPS investments held the edge
Since the National Pension System (NPS) was opened up for all citizens in May 2009, conservatism had initially paid off for investors as schemes betting on fixed income avenues outscored equity. But, the last few years have shown why Bob Dylan was right about ‘times they are a-changin’.
As the NPS for ordinary citizens celebrates its 13th anniversary , the average returns of Tier I schemes that invest in equities (Scheme E) have outperformed those that invest in government securities (Scheme G) and other fixed income instruments (Scheme C) and alternate assets (Scheme A) categories over three-, five-, and ten-year timeframes.
Equity all the way
It is heartening to see that despite the recent correction, stock-linked NPS investments still hold the edge over other asset classes (see accompanying table). NPS investors last year would have tasted a bite of equity’s sweet success. Good performance in 2020-21 played had pushed up returns in the equity (Scheme E) option under NPS.
In the three-year period ended May 20, 2022, average return of Scheme E (11.93 per cent) has outpaced Scheme G, Scheme C and Scheme A by 373-445 basis points (1 bps = 0.01 per cent).
The outperformance of Scheme E is in 327-382 bps range in five years (average return 11.3 per cent) and 446-475 bps range in 10 years (average return 13.65 per cent). Scheme A funds do not have 10-year history.
These returns can provide encouragement to investors of NPS, which is a long-term investment with restricted withdrawal options, for depending on equity to deliver the goods. Scheme E of NPS has also beaten the comparable mutual fund category (large-cap) funds by 227, 84 and 133 basis points in 1-, 3- and 5-year periods, respectively.
In the large-cap space, NPS investors of Scheme E gain from low-costs compared to large-cap MFs as NPS has low handling and administrative charges.
Under the ‘Active’ choice, investors can allocate up to 75 per cent in Scheme E up to the age of 50. Under the ‘Auto’ choice, Scheme E allocation ranges from 5 to 75 per cent based on your age and option chosen (conservative, moderate or aggressive).
Where’s Mr. Alpha in equity funds ?
While Scheme E’s average returns are now better than those of large-cap funds, the benchmark BSE 100 TRI appears a hard nut to crack.
Thus, there is obvious room for improvement in terms of alpha (i.e. excess return over benchmark). Over the one-year period, only one (LIC) among the seven Scheme E funds has beaten the equity benchmark. Over 3-, 5- and 10-year periods, not even one among Scheme E funds has delivered any alpha. One can, of course, argue that many large-cap funds in MFs have lagged benchmarks too.
The poor alpha generation of NPS equity funds marks a contrast to Scheme G funds. Despite G-Secs being under pressure due to rising yields, these NPS funds boast of far better alpha.
All the Scheme G funds have outshined their relevant benchmark across all periods (1-, 3-, 5 and 10-year). However, like Scheme E, Scheme C funds, on average, have generally lagged their relevant benchmark across periods.
Schemes G,C beat MFs
While Scheme E has no doubt trumped Scheme G and C, not all is lost for those with a lower risk appetite.
Like NPS equity funds, Scheme G and Scheme C funds show comprehensive out-performance over average returns of equivalent mutual fund categories (gilt, medium, medium to long and long duration mutual funds) in at least three years or longer periods by 102-150 bps and 206-310 bps respectively.
Scheme C carries slightly higher risk than Scheme G, though funds invest over 80 per cent in AAA-rated bonds. Scheme C funds have historically not been immune to the turmoil in the corporate bond market.
Scheme A funds, which invest in alternative assets, do not have a very long track record but they seem to have done better than fixed income asset class peers in the 1-, 3- and 5-year period, with 9.04 per cent, 8.20 per cent and 8.03 per cent respectively.
Published on May 28, 2022