When you use any NPS calculator to calculate the maturity value of your contributions in the scheme, the growth rate has to be assumed as the returns are not guaranteed. While several studies done in the past have shown that over the long term, equity as an asset class has generated a higher inflation-adjusted return […]
When you use any NPS calculator to calculate the maturity value of your contributions in the scheme, the growth rate has to be assumed as the returns are not guaranteed. While several studies done in the past have shown that over the long term, equity as an asset class has generated a higher inflation-adjusted return over other asset classes such as debt, gold and real estate, most of the time the growth rate assumption is in the range of 8 per cent to 12 per cent.
Let us see how has been the performance of NPS over the long term. To find out the performance of the equity scheme of NPS, we look at the fund option E or the Asset Class E of the Tier 1 NPS scheme.
NPS provides the option to invest across various asset classes, including equities and debt but under the fund option called ‘Scheme E’, the allocation is predominantly into equities. 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.
Here, we look at the returns generated ( as on 10 July 2020) by all the 7 pension fund managers over the last 1,3, 5,7, 10 years and since inception. Also, the returns generated by their benchmark is shown.
The top 5 stock holdings of almost all the PFMs includes – HDFC Bank, Reliance Industries, Infosys, Housing Development Finance Corporation, ITC, TCS , ICICI and Kotak Mahindra Bank with varying allocation in them.
Over the last 1 year, only 3 PFMs out of 7 have fallen less than the Benchmark while over the long term, the funds which have more than 10-years of history, all are above the benchmark returns. Those three PFMs are – Birla Sun Life Pension Management, HDFC Pension Management and Kotak Mahindra Pension Fund.
The UTI Retirement Solutions has clocked 8.94 per cent over the 10-year period while the maximum return of 10.04 per cent was of Kotak over the 7-year period.
Selection of Pension Fund Manager
The National Pension System (NPS) is a defined contribution retirement savings scheme, managed by the PFRDA. While filling the application form whether online or offline, one needs to select the fund options, the pension fund (PF) manager, the investment strategy and even the annuity provider.
If, however, the subscriber doesn’t select any of the options under each such category, there is a default option provided by the PFRDA for each of them. The SBI Pension Funds acts as the default Pension Fund Manager. If you do not exercise your option to select any of the PF managers, by default SBI Pension Funds will be your fund manager.
For someone investing Rs 6700 per month in NPS, assuming a return of about 8 per cent, the NPS fund value could approximately be Rs 1 crore after 30 years. 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.