The pension fund regulator is looking to expand the investment universe of the retirement corpus to include gold and silver exchange traded funds, and venture capital funds. Saikat Neogi explains how investing in precious metals can deliver better long-term wealth creation for subscribers
l Diversification of investible assets
THE PENSION FUND Regulatory and Development Authority (PFRDA) may allow pension funds under the National Pension System (NPS) to invest in gold and silver exchange-traded funds, venture capital funds, and private credit. Broadening the universe of investible assets will enable pension fund managers (PFM) to potentially earn higher returns for NPS investors. Commodities, particularly precious metals, act as a natural hedge when equity and debt markets underperform. In fact, in the last one year gold has yielded 53% returns as compared with less than 1% in equities. “A small allocation, even around 10%, can provide stability to the overall portfolio and help reduce volatility,” says Rahul Bhagat, CEO, DSP Pension Fund. Pension funds can tactically allocate to commodities during market cycles, potentially delivering better long-term wealth creation for subscribers. This addition not only offers pension funds greater flexibility in portfolio construction but also has the potential to enhance long-term risk-adjusted returns for subscribers, making the scheme more resilient in varying market conditions.
l Current investment norms
AT PRESENT, THE NPS allows investment into equities, corporate bonds, government securities and alternative investment funds. Pension fund managers invest in central and state government securities and bonds issued by public sector undertakings under Extra Budgetary Resources. The fund managers invest in debt paper of companies including banks and public financial institutions. They can also invest in debt securities issued by Real Estate Investment Trusts and Infrastructure Investment Trusts. For equity, fund managers invest in listed (on BSE and NSE) top 200 stocks in terms of full market capitalisation. They can hold stocks beyond the top 200 stocks only up to 2% of the assets under management under equity schemes. For alternative asset classes, they can invest in category 1 and II alternative investment funds such as start-up, infrastructure, SME and venture capital funds.
l Investment options in NPS
NON-GOVERNMENT NPS subscribers can choose between two investment options — Active Choice and Auto Choice. This offers flexibility to manage investments based on the subscriber’s risk appetite. They can choose their PFM and allocate funds among four asset classes such as equity (up to 75%), government securities (up to 100%), corporate debt (up to 100%) and alternative investment funds (up to 5%). For government employees, the equity exposure is capped at 50%. Subscribers can go for a systematic lumpsum withdrawal plan which will enable them to withdraw a fixed amount periodically and let the corpus stay invested in market-linked instruments.
The regulator has recently proposed reducing the compulsory annuitisation from 40% to 20% and has also proposed that subscribers could be allowed to exit the NPS after 15 years, even before reaching 60 years of age.
l Schemes for non-govt sector
FROM OCTOBER 1, PFMs can customise and offer multiple schemes with equity exposure up to 100% to private-sector subscribers. At present, the equity exposure is capped at 75% for the non-government sector. Effective October 1, this will open opportunities for product innovation and market expansion and allow fund managers to design schemes suited to diverse groups and to compete on performance and service quality. Existing and new subscribers can opt for multiple schemes. The framework, which will be available through both Tier 1 (retirement-focused) with a vesting period and Tier -II (voluntary savings), where vesting period is optional, will enable subscribers to balance conservative and aggressive strategies within the same account number. Pension fund managers will design schemes for a specific range of age or occupation such as digital economy workers, self-employed, corporate employees, professionals and consultants.
l How global pension funds do it
GLOBALLY, PENSION FUNDS allocate invest in equities in domestic and international markets including emerging markets. For fixed income, they invest in corporate debt, sovereign bonds, and high-yield bonds. They invest in private equity, unlisted companies, venture capital, buyouts, infrastructure projects such as roads, ports, utilities, renewable energy projects. They also invest in commodities such as gold, silver, oil, and agricultural products. The global best practice is a multi-asset approach, often with a 70:30 mix. “This diversified multi-asset approach helps global pension funds generate stable yet higher long-term returns while managing risk,” says Kurian Jose, CEO, Tata Pension Fund Management. For example, Canada Pension Plan Investment Board, with net assets of $715 billion as on March 31, 2025, invests across multiple assets across countries. The fund returned a 10-year annualised net return of 8.3% as on March 31 this year.