NPS score-card

Whether it is equity, government debt or corporate bonds, fund managers take a low-risk, low-cost strategy to outperform

As an important retirement investment vehicle, the national pension system (NPS) offers considerable diversity — equity, government debt and corporate bonds.

Majority of the eight fund managers have delivered well across all three asset classes over the past few years. In the equity portion, most of the NPS managers have managed to record returns that are close to those of bluechip indices and better than the large-cap mutual fund category.

In corporate debt and government bond categories, all NPS managers have outperformed standard benchmarks.

Whether it is equity, government debt or corporate bonds, these fund managers take a low-risk, low-cost strategy to invest in the available avenues.

While most of the portfolio is managed in a somewhat passive manner, there is an element of fund manager intervention in adjusting holdings based on equity and debt market volatilities.

We analyse the portfolio holdings of various NPS fund managers across categories over the last few years, to assess the level of risks taken, suitability for investors, and explain the reasons for their out/under-performance. While Birla Sun Life began its operations just over a year back, the other seven — HDFC, ICICI Pru, Kotak, LIC, SBI, Reliance and UTI — have been around for over five years now.

Safety in bluechips

Given that the investment universe for the equity portion of the NPS is restricted to Sensex, Nifty 50 and Nifty 100 stocks, fund managers have stuck to the mandate.

Though the portfolios are not passively-managed, these fund managers tend to buy most of the stocks in the Nifty 50 basket, and a few from the Nifty 100 index.

In this regard, Reliance, SBI, UTI, HDFC and ICICI maintain a portfolio of anywhere between 50 and 70 stocks picked from the indices mentioned earlier. The weightage assigned to stocks is not necessarily the same as prevalent in the index. So Reliance Industries, ITC, Infosys and TCS may be among the top stocks held in turns. But portfolios are not churned that actively to reflect fundamentals.


As such, most of these fund managers maintain a fairly diffused portfolio, with exposure to individual stocks restricted to less than 3 per cent, barring the top few holdings.

Portfolio churn is minimal, with mostly the weightages of holdings alone being altered over the past two to three years.

HDFC and SBI also take cash positions to the tune of 5 per cent of the portfolio during volatile markets, which protects downsides when stocks correct significantly.

This somewhat passive stock selection strategy has worked for SBI, UTI, HDFC and ICICI, with these NPS fund managers almost equalling or mildly exceeding benchmark indices, Nifty 50 and Nifty 100, over one-, three- and five-year time-frames. Thus, most NPS managers have delivered above-average returns without taking any undue risks that may come with an actively-managed mutual fund.

What comes as a surprise though is that these fund managers have managed to deliver better returns than even the actively-managed mutual funds from the large-cap stable. Of course, some portion of the outperformance can be explained by the higher cost structure (1.5-2.5 per cent) that actively-managed funds incur. That NPS managers have managed to match the MF category with a low-cost, low-risk strategy is still a healthy trend.

UTI has the best track record across periods and has delivered more than benchmarks and the large-cap MF category. It holds as many as 70 stocks, and a highly diffused portfolio. HDFC and ICICI too have performed reasonably well, especially over longer time-frames.

Reliance has been an underperformer within fund managers which follow this strategy, mostly lagging peers and the bluechip indices.

Now, Birla Sun Life is the only NPS fund manager to take fully active calls on its equity portfolio. In the year or so of its existence, it has maintained a portfolio of 25-30 stocks and has actively altered positions in its holdings. It is little surprise then that Birla Sun Life tops the list in terms of returns delivered over the last one year.

Two other fund managers — Kotak and LIC — have taken very different approaches compared to others.

These two NPS players invest in large-cap mutual fund units.

Kotak invests in the units of Aditya Birla SL Frontline Equity, Aditya Birla SL Top 100, SBI Bluechip, Franklin India Bluechip, ICICI Pru Focused Equity, SBI Magnum Multiplier, DSPBR Opportunities and Mirae Asset India Equity, among others. These are holdings as of March 2018. Most mutual funds have stocks within the Nifty 100 universe. There may be mid-cap stocks or companies that fall outside the Nifty 100 too. But after SEBI guidelines came to force over the past couple of months, the mandate of many of these funds have changed, and Kotak NPS may have made suitable alterations.

Each fund accounts for about 7.2-9.6 per cent of the portfolio.

The investments are in the direct plans of the diversified funds mentioned above, with about a percentage point lower charges than regular options. But even at 1-1.5 per cent, the charges are higher than that involved in investing directly in equity.

Kotak has underperformed over one- and five-year timeframes vis-à-vis the large-cap MF category and the Nifty 100.

The strategy adopted by the fund managers has a few important factors to note. By investing in mutual funds, the manager is effectively making the strategy passive.

Next, as the Kotak NPS invests in multiple funds with the same mandate, there would be considerable portfolio overlap. As almost all of those investments are large-cap schemes, the mutual funds would sport very similar holdings.

LIC invests directly in equity, mostly stocks from the Nifty 50, and in mutual fund units of large-cap schemes. It has underperformed the bluechip indices as well as the mutual fund category across all time-frames.

The shuffling in stocks without giving higher weightage to outperforming shares may explain LIC’s relative underperformance. In this case too, there would be portfolio overlap with its mutual fund holdings and equity shares.

Plan of action: Overall, if you are satisfied with index-fund level of returns, then at least five of these NPS managers appear well-placed to deliver such returns, with mild outperformance over the long term.

This avenue is suitable for moderate risk investors if their only investment in equity for retirement is through the NPS.

Those with a higher surplus and the ability to take more risks can go for mutual funds and invest in mid- and multi-cap funds for the long term — seven to 10 years at least. These funds can deliver 3-5 percentage points more than the benchmarks over such periods.

Delivering on gilt

All the NPS gilt fund schemes have managed to outperform the CRISIL 10-year Gilt Index and deliver reasonable returns across time-frames.

The returns — 9-10.5 per cent over the last five years — are better than even what actively-managed debt funds delivered.

The yield on the 10-year G-Sec has already risen by about 125 basis points in the last one year, after the US Federal Reserve started raising rates. Even the 364-day treasury bill has a yield of nearly 7.3 per cent. Hardening inflationary expectations, mostly due to the spike in crude prices, have meant that the RBI — which was seen as being behind the curve in interest rates action — hiked rates by 50 basis points within two months.


It is common knowledge that bond prices and yields move in opposite directions. That is, higher the yields, lower the bond prices. Therefore, bond fund managers need to carefully take calls on the interest rate scenario, yields and profiles of securities that mature at various times, so that prices don’t fall inordinately, causing losses to investors.

NPS gilt fund managers have managed to juggle the average maturity profile of their holdings and tweak the modified duration, so as to gain from the changing interest rate scenarios. Modified duration measures the sensitivity or change in the price of a debt instrument to a change in interest rates.

Most of the managers have invested in listed Government of India securities maturing from 2028 to 2051. In addition, they also take exposure to various State Government development loans.

LIC has been the best in the category, delivering the highest returns across one-, three- and five-year periods. Its portfolio’s average maturity was 20.4 years last July, which was altered to about 16.4 years recently. The modified duration too was reduced.

In a rising interest rate scenario, generally, the average maturity is lowered as shorter maturities are preferred for better returns.

HDFC has reduced the average maturity to about 13.4 years from 17.4 years in the last 12 months. The modified duration has also been decreased to 7.4 years from nine years earlier.

Thus, all these fund managers have actively taken calls on the maturity profiles and delivered robust returns over the long term, comparable with the best in the debt mutual fund category.

Going for higher corporate yields

As with gilt investments, all NPS managers of corporate bond schemes have almost equalled or outperformed the CRISIL Composite Bond Fund Index across all periods — one, three and five years.

From secured non-convertible debentures (NCDs), bonds and other debt instruments of NBFCs, NABARD, Exim Bank and high-quality private sector companies, NPS fund managers invest in an array of options. They also invest in infrastructure bonds.


ICICI Pru has been the best manager in the category, delivering ahead of peers across time-frames.

The pension fund regulator has progressively allowed investments in instruments down the rating curve over the years — apart from the highest-rated AAA bonds, AA+, AA and A rated securities are also allowed for investments. Although lower-rated securities increase risks, the higher returns are expected to compensate adequately.

In managing corporate bonds too, investments are actively managed to benefit from changing interest rate scenarios. ICICI Pru, for example, has a portfolio with a yield-to-maturity of 8.6 per cent compared to 7.3 per cent in last July.

Typically, most fund managers have 70-90 per cent of the portfolio in AAA-rated securities, with the rest in lower-rated instruments.

Exposure is always to quality companies even in AA-rated securities, and there are minimal risks taken in the portfolio on the corporate debt portion.

LIC is the only fund manager to mildly lag the benchmark over a one-year period, but has beaten it over longer time-frames.

Plan of action: The outperformance of all NPS fund managers in the gilt and corporate debt categories holds important takeaways for investors.

For those parking sums in equity mutual funds for the long term, investing in gilt and corporate debt options of NPS alone, without taking exposure to the equity portion, would be a good idea.

A reasonably good active mutual fund could deliver better returns than the benchmarks over the long term, with a dash of mid- and small-cap stocks in the portfolios. With the equity portion of the NPS delivering returns that are on a par with those of index funds, those already investing in mutual funds can skip the equity option.

Investment in the debt categories comes at lower costs compared to debt mutual funds. NPS charges just 0.01 per cent for asset management, while debt mutual funds have expense ratios ranging from 0.5 per cent to 2.1 per cent.

Also, 40 per cent of the corpus on retirement at 60 is tax-free in the case of NPS. Thus, there is a tax advantage as well.

A debt mutual fund is taxable, with indexation benefits, if there are long term capital gains(holding period of three years and more).

Thus, if you are saving for retirement, you can consider investing in government bonds and corporate debt categories of NPS instead of debt funds.

But if you have no other equity investments, you must park a portion of your corpus in the NPS equity option in accordance with your risk appetite and asset allocation requirement.

Alternative assets, a non-starter

The pension fund regulator allowed NPS managers to invest in alternative assets — alternative investment funds (AIFs), real-estate investment trusts and infrastructure investment trusts, and so on.

But this asset class has been a non-starter as there is very limited investor interest. For one, the corpus accumulated is very small. Most fund managers have less than 1 crore in this category. HDFC, ICICI Pru and SBI have accumulated 2-3 crore in the asset class ‘A’ category.

Most AIFs require a minimum investment that is well in excess of the entire corpus of these funds, thus leaving NPS managers with insufficient amounts to invest in these avenues.

Thus, most NPS managers in the category have parked the accumulated corpus in safe money market instruments and have managed to deliver around 7 per cent returns in the last one year.

HDFC has invested its corpus in the AIF category in the perpetual additional tier-1 (AT1) bonds of IndusInd Bank, ICICI Bank, SBI and Axis Bank.

Plan of action: Alternative investments are typically for high net-worth individuals looking to diversify across asset classes. They may not be suitable for investors looking to save for retirement.

Lack of meaningful avenues to park the amounts is also an impediment.

Investors can thus skip this asset class ‘A’ for the present, while investing in the NPS.

** This article was originally posted on BusinessLine by K.VENKATASUBRAMANIAN