It has been 15 years since the National Pension System (All Citizen Model) was launched, back in May 2009. Since then, NPS schemes have become a crucial part of retirement planning for Indian citizens.

And the stock market hitting record highs several times in the past year has boosted the return performance of the equity option (Scheme E) under the NPS. With over 11 pension funds in the NPS, the latest entrants being Axis, Max Life, and DSP in the last two years, they collectively manage assets worth around ₹1.7 lakh crore in Tier 1 schemes, with equity, government bonds (Scheme G), and corporate bonds (Scheme C) constituting 45 per cent, 34.9 per cent, and 19.8 per cent, respectively, as of April 26. Let’s dive deeper into how each Tier 1 scheme has performed.

Active investing

The return analysis of Scheme E Tier I funds reveals a consistent trend of outperformance compared to other asset classes, attributable to the buoyant Indian markets. Over a five-year period, Scheme E exhibited returns surpassing other asset classes by twofold, while the outperformance of Scheme E ranged at 500 to 553 basis points (bps) over a 10-year horizon, with an average return of 14.3 per cent. This can encourage subscribers looking for active investing under the NPS to consider Scheme E over others, despite its long-term investment nature and limited withdrawal options.

However, despite Scheme E’s reasonable returns, it falls short when compared to relevant mutual fund category funds, particularly large-cap direct plans, by 300, 40, and 120 bps over one, five and 10-year periods, respectively. There’s a slight exception over a three-year period where Scheme E marginally outpaced large-cap funds by 20 bps. Nonetheless, considering the nominal fund management fees, along with associated tax benefits and the flexibility of tax-free rebalancing between asset classes, investors may still find Scheme E an attractive proposition over mutual funds, with the privilege of choosing their asset allocation choice.

Under the ‘Active’ choice, investors have the flexibility to allocate up to 75 per cent in Scheme E until the age of 50. Conversely, under the ‘Auto’ choice, Scheme E allocation varies from 5 per cent to 75 per cent depending on age and chosen option (conservative, moderate, or aggressive).

On the alpha front (i.e., excess returns over benchmark), Scheme E has delivered decent performance, with six and four out of 10 funds (excluding DSP fund launched in December 2023) respectively, surpassing the equity benchmark S&P BSE 100 TRI over one- and three-year periods while the returns aligned closely with the benchmark over the five-year period. However, over the 10-year period, none of the funds managed to surpass the benchmark, a phenomenon common even among large-cap funds in mutual funds, which have similarly fallen short of beating the benchmark.

Passive investing

While equity schemes have failed to generate alpha, Scheme G funds present a contrasting scenario. Across all periods (one, three, five and 10-year), Scheme G funds have consistently outperformed the benchmark Crisil 10 Year Gilt Index despite the pressure on G-Secs from rising yields. Conversely, Scheme C funds have, on average, delivered returns on par with the benchmark CRISIL Composite Bond Index over these periods.

However, in contrast to NPS equity funds, both Scheme G and Scheme C funds have outperformed against the average returns of equivalent mutual fund categories. For instance, over the one-, three-, five- and 10-year periods, Scheme G has generated average returns of 7.4/5.8/8.2/9.3 per cent respectively, surpassing the performance of gilt funds with a 10-year constant duration, which returned (average) 6.4/4.6/7.3/8.7 per cent over the same time span.

Similarly, Scheme C has exhibited higher average returns compared to the average returns of corporate bond funds by 20 bps, 40 bps, 110 bps, and 100 bps respectively in the one-, three-, five-year and 10-year periods. Despite scheme C carrying a slightly higher risk profile compared to Scheme G, it didn’t deliver higher returns compared to scheme G.