The only silver lining for the subscribers of National Pension System (NPS) is that the fall in the fund value may not be as bad as that of other competitive investments.
The stock market turmoil has taken its toll on the NPS equity returns as well. The only silver lining for the subscribers of National Pension System (NPS) is that the fall in the fund value may not be as bad as that of other competitive investments. Importantly, the maximum investment in equities is capped in NPS and could be either 50 per cent or 75 per cent or even lower depending on age and the option opted by the subscriber.
The NPS return of the Equity Fund E has also taken a hit during the recent meltdown in the equity markets. The returns are as per the NPS Trust website that shows the snapshot of NPS Schemes return.
As on March 13, 2020, the compounded annualised return of Scheme E (Tier I) has been in the range of a negative return of about 9.84 to minus 15.58 per cent over the last 1 year.
The 3-year and 5-year return has been in the range of a negative of about 0.69 to -4.3 per cent, respectively.
Even the 7-year and 10-year return have remained in a range of single-digits of about 8.5 to 8 per cent, respectively.
However, the benchmark returns for the 1-year, 3-year, 5-year, 7-year and 10-year has been -12 per cent, 4.18 per cent, 3.68 per cent, 8.83 per cent, 7.43 per cent respectively.
For someone investing Rs 7000 per month in NPS, assuming a return of about 7.43 per cent, the NPS fund value as of now could be about Rs 12.5 lakh now. The actual return and the fund value will, however, be different as only a portion goes into equities and balance into debt funds. The actual return for NPS subscriber is a weightage return across his or her investments in different funds. One can use the NPS return calculator to find the actual return.
The returns are for the pension fund managers that include Birla Sun Life Pension, HDFC Pension, ICICI Pru. Pension Fund, Kotak Mahindra Pension Fund, LIC Pension Fund, SBI Pension Funds, UTI Retirement Solutions.
Source: NPS Trust
Over the long term, equities are assumed to be performing better than other asset class. NPS being a retirement-focused investment, its better to de-risk at least three years away from retirement.
For the NPS subscriber, there are two investment options – Auto Choice and Active Choice wherein the NPS money is invested across equity share, Corporate debt, Government Bonds and Alternative Investment Funds. As a subscriber, one needs to first select the PFM, and post-selection of PFM, Subscriber has an option to select any one of the Investment Options.
Under Active Choice, the subscriber has the right to actively decide how much to invest in equity and debt funds but up to 50 years of age, the maximum permitted equity fund is 75 per cent of the total investment in NPS and then as one age, the allocation tapers off.
Under Auto Choice, the investments will be made in a life-cycle fund. The one with maximum equity exposure is the LC75 – Aggressive Life Cycle Fund which has a cap of 75 per cent of the total NPS investment of the subscriber and then it tapers off with age.