SIP investments in ELSS more volatile than NPS in long term

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Published: August 8, 2018 3:10:37 AM

National Pension Scheme (NPS) as a retirement planning tool has been gaining traction since it was thrown open to all classes of investors in July 2009.

SIP investments, NPS in long term, National Pension Scheme, ELSS, NPS in Tier I option, NPS asset allocationIn case of SIP investments in large-cap, mid-cap and ELSS, return expectations continue to remain high, but with added volatility.

National Pension Scheme (NPS) as a retirement planning tool has been gaining traction since it was thrown open to all classes of investors in July 2009. In the previous article on this subject, we looked at the returns generated by the NPS in Tier I option since July 2009 till June 2018.

We had considered the case of a 40-year-old investor in 2009 (current age 49), who invests Rs 25,000 every July and January (starting July 2009), in NPS Tier 1 option, managed by one of the biggest pension fund managers in India with moderate (auto) asset allocation mode. And this was compared with the investments of similar nature in large-cap, mid-cap and an equity-linked savings scheme (ELSS) for the same period.

It was observed that in the period 2009 –18, total investment of Rs 4.5 lakh in NPS had grown to `7.14 lakh (touching a high of `7.23 lakh) and registering an internal rate of return (IRR) of 9.6%. The overall volatility, however, has remained quite benign; a total of four drawdowns greater than 5% and only one instance of drawdown greater than 10%.

Analysis from 2014 to 2018

Further to the above analysis, we also studied the same approach to investments but in a different period: January 1, 2014 to June 25, 2018. In this study, we again take an investor of age 45 (as of January 1, 2014), investing Rs 25,000 every July and January (starting January 2014) in NPS Tier 1 option with moderate (auto) asset allocation mode. The total investment of Rs 2.25 lakh had the value of Rs 2.78 lakh as of June 25, 2018, with IRR at 8.66%. The interesting observation in this case was the absence of volatility.

The portfolio never dipped below 5% in this period, with a maximum drawdown being limited to 4.56%. The story is a bit different for a mutual fund allocation portfolio. In case of mutual fund portfolio, the total investment of Rs 2.25 lakh grew at the rate of 10.33% to `2.89 lakh, while hitting a peak of `2.93 lakh.

NPS less volatile

There have been four instances of drawdowns greater than 5%, but not once did the portfolio cross the 10% drawdown mark. Maximum drawdown registered was 6.97%. The volatility performance was comparable to that of an NPS asset allocation (only slightly volatile than NPS), but the returns delivered were superior.

In case of SIP investments in large-cap, mid-cap and ELSS, return expectations continue to remain high, but with added volatility. While the IRR for large-cap and mid-cap were 12.37% and 15.82%, respectively, ELSS investment registered 9.92%, not even at par with the MF asset allocation, which delivered 10.33% IRR in the period considered. In terms of maximum drawdowns as well, large-cap and mid-cap were at similar levels, dropping in value by a maximum of 13.6%.

It is observed that NPS continues to remain least volatile, but nonetheless, wealth creation is also subdued. The MF asset allocation strategy has increased volatility as compared to the NPS, but only marginally (NPS has highest drawdown of 4.56% whereas MF allocation has 6.97%). The IRR for the MF allocation is 10.33%, as compared to 8.66% for that of NPS.

Higher returns from pure equity

Pure equity allocation have better returns in the range 12.37-15.82% (excluding ELSS, which has only a return of 9.92%), but also have increased volatility. The maximum drawdown was 13.6% as compared to 4.56% for NPS. So, as an investor if you are looking at lower volatility and standard deviation in your investment portfolio, NPS drives home the point.

The writer is managing partner, BellWether Advisors LLP. Inputs from Siddharth Prasai

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