The Pension Fund Regulatory and Development Authority (PFRDA) has allowed National Pension System (NPS) funds to add gold and silver ETFs along with several other assets, as per an official circular. The goal is to give Pension Funds more legitimate avenues for diversification, while also laying out strict caps so no single riskier asset becomes too large in the portfolio. These changes apply to both the Government Sector (GS) and Non-Government Sector (NGS) schemes, covering everyone from central and state employees to retail and HNI subscribers.
1. Gold and Silver ETFs
NPS funds are now officially allowed to invest in Gold and Silver ETFs that are regulated by SEBI. This is a major shift because precious metals were never clearly defined as eligible assets earlier. For Non-Government Sector (NGS) subscribers, which includes retail and HNI investors, gold and silver ETFs are grouped inside the equity category (Asset Class E). They share this space with REIT units and equity-focused AIFs, and the entire group cannot exceed 5% of the equity allocation. This 5% is a combined bucket, not a separate limit for each item. This means gold and silver can be used to add stability to the portfolio, but only in moderation. For Government Sector (GS) schemes, the limit is even tighter because gold has a separate cap of 1% of the scheme’s total assets, and silver also has a separate cap of 1%. These limits apply individually to each metal. The circular also clarifies that Pension Funds are allowed to charge investment management fees on these ETF holdings, which removes ambiguity about cost treatment and helps funds plan portfolios without worrying about fee restrictions.
2. Alternative Investment Funds (AIFs)
PFRDA has now clearly laid out the conditions under which NPS funds may invest in AIFs, something that earlier circulars allowed only in fragments. Only Category I and Category II AIFs are permitted, and every AIF must have a minimum corpus of Rs 100 crore. These conditions ensure that NPS money goes only into larger and more established funds rather than smaller, riskier pools. Pension Funds cannot invest more than 10% of an AIF’s total size, which prevents overexposure to any single fund, even if that fund grows later. For NGS schemes, debt-oriented AIFs are grouped with InvIT debt and Basel III Tier I bonds, and the combined exposure cannot cross 5% of the debt allocation. Meanwhile, equity-oriented AIFs are grouped with gold and silver ETFs and REIT units, and this combined exposure is capped at 5% of the equity allocation. These caps ensure that while investors gain access to specialised strategies through AIFs, the overall exposure stays small and controlled.
3. REITs and InvITs (Units and Debt)
The circulars now give a structured framework for investing in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Both units and debt securities issued by these trusts are permitted, but the rating standards are very strict. For Government Sector schemes, the trust issuing the debt must hold a AAA rating from at least two SEBI-registered credit agencies. For Non-Government Sector schemes, REIT and InvIT units must be rated at least AA by two agencies. These rating rules ensure that pension money flows only into trusts with proven financial stability. In addition, PFRDA has placed a cap on cumulative exposure so the total investment in REITs and InvITs, including both units and debt, cannot exceed 3% of the total AUM of the Pension Fund. This keeps the exposure small even if markets grow or new trusts are launched, preventing real estate or infrastructure from crowding out more stable assets.
4. Municipal Bonds
NPS funds can now invest in listed or to-be-listed municipal bonds, which earlier were not clearly defined as an eligible asset. This gives Pension Funds a way to participate in well-rated urban development projects such as water supply, roads or urban infrastructure. However, the safety filters are very strict. For Government Sector schemes, municipal bonds must have a AAA rating or an equivalent grade from at least two SEBI-recognised rating agencies. This ensures that only the financially strongest municipalities can receive NPS money. These rules prevent Pension Funds from taking on the risks associated with weaker municipal issuers.
5. Government of India Debt ETFs
PFRDA has allowed Pension Funds to invest in Debt ETFs issued by the Government of India that invest in bonds of major public-sector bodies such as CPSEs, CPSUs and CPFIs. These ETFs offer liquidity and transparency because they trade on exchanges, and they also spread risk across multiple government-owned firms instead of concentrating exposure in one issuer. The exposure is capped so GS schemes cannot invest more than 5% of their debt allocation in these ETFs and NGS schemes cannot invest more than 5% of Asset Class C. This ensures the ETFs serve as an added tool for stability, not a replacement for traditional government securities.
6. Basel III Additional Tier I Bonds
NPS funds may now invest in Basel III Additional Tier I (AT1) bonds issued by scheduled commercial banks, All India Financial Institutions and government-owned NBFCs. These instruments come with a higher risk, and PFRDA has placed several layers of protection around them. For Non-Government Sector schemes, AT1 bonds share a combined 5% limit with debt-oriented AIFs and InvIT debt within the debt category. A Pension Fund cannot hold more than 20% of the total AT1 bonds issued by any one bank or issuer, preventing concentration in a single bank. Another guardrail applies across all schemes under that Pension Fund, so total exposure to AT1 bonds cannot cross 5% of the Pension Fund’s total AUM. These controls are meant to ensure that AT1 bonds remain a very small slice of the portfolio, given their history of sudden write-down risk.
What could this mean for NPS subscribers?
Apart from adding new asset types, PFRDA has increased the overall flexibility for Pension Funds by lifting the asset allocation ceiling from 140% to 150%. This gives fund managers a little more room to handle inflows and rebalance portfolios without breaking limits. Even with this extra space, the regulator has said that every investment must go through full due diligence and that no Pension Fund should rely only on credit ratings when taking decisions.