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BT Buzz: Did you check your NPS returns yet? Time to review and make adjustments

NPS has three basic investment options in the form of equity fund, corporate bond fund and government security fund where you can divide your investment based on your preference

BT Buzz: Did you check your NPS returns yet? Time to review and make adjustments

Having a good source of regular income post-retirement is part of everyone's wishlist. However, it needs years of discipline and a bit of financial acumen to make sure you reach your retirement income goal. With number of subscribers standing at 1.34 crores at the end of May 2020, National Pension System (NPS) has gradually grown over years to become one of the most widely used tools of saving for pension with Rs 4.38 lakh crore assets under management. NPS has three basic investment options in the form of equity fund, corporate bond fund and government security fund where you can divide your investment based on your preference.

Investors prefer equities as they are known to deliver higher returns in the long-term. If part of investment is invested into equities it enhances overall portfolio return if you have a longer time horizon. However, recent correction in equity market when the market fell by 38 per cent till March 23 from the peak registered in January, has shaken the confidence of investors. Many of them have been thinking about reducing their equity exposure or moving out of it completely. We tell you why equities have given good return in the long-term in the past and why they are still best placed to give you better return in the longer run in future.

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Equity funds having robust recovery

The biggest correction in the equities has impacted the short-term return as most of the equity funds are still giving negative return on short-term basis. "Correction in the equity markets has impacted equity plans of NPS as well. These plans have delivered negative returns over the last one year," says Sahil Arora - Director & Group Head, Investments, Paisbazaar.com.

Equity market is known for short-term volatility when it can face significant correction. However, NPS is an investment which has one of the longest time horizons. So it is the long-term return in NPS that matters more than short-term variations. This time also the fall in equities was followed by a robust recovery as equity benchmark Sensex is only 13 per cent away from its peak.

Despite this major correction most of the NPS equity funds have given more than 8 per cent annualised return in a 10-year period. Four out of seven funds operating as NPS funds have track record of 10 years. The best performer in this category is UTI Retirement Solutions which has given a return of 8.84 per cent compounded annual return in last 10 years. It is followed by ICICI Prudential Pension Fund Management fund with 8.24 per cent. Over the last five years, five out of seven funds have given more than 5 per cent annualised return with UTI Fund having a return of 6.97 per cent.

Once the equity market completely recovers and rallies even higher these funds are bound to deliver better return.

Bond funds may not repeat past performance

A minimum of 25 per cent has to be invested in corporate or government bond funds. However, people who had much higher allocation to these funds till now stand to benefit as bond funds have performed very well.

This is the time that proved that not only equities but bond funds have also saved the day when equities faced turmoil. "A good diversification and an asset allocation according to the needs and risk tolerance levels of people is always suggested - not just in a crisis situation. What will suit a person can vary and can be tailored based on their personal situation," says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

"Corporate and government bond plans have done well over the last one year due to the ongoing falling interest rate regime," says Arora. "Bond prices and broader interest rates have an inverse relationship. Falling interest rates lead to capital appreciation in government and corporate bonds, especially those with longer maturity profiles," he adds.

ICICI Prudential Pension Fund Management has topped the chart in the 10-year segment in the corporate bond category with 10.56 per cent returns, whereas Birla Sun Life Pension Management Fund fetched 14.08 per cent in the one-year segment.

When it comes to government bond funds, the returns are equally impressive. SBI Pension Funds has delivered an annualised return of 10.07 per cent over a 10-year period. It was followed by ICICI Prudential Pension Fund Management Fund with 9.90 per cent. HDFC Pension Fund topped the one-year return chart with 14.05 per cent.

However, going forward, it will be difficult for the bond funds to repeat the performance. "Higher exposure to bonds with longer maturity during a rising interest regime adversely impacts the bond prices," says Arora. As interest rates have reached to lowest level seen over a decade the chances of rates falling further to a significant extent is very less. So it may be a good move to curtail some part of bond fund exposure.

What should you do with investment mix?

After witnessing high volatility in the equity market most of the investors are having a relook at their equity exposure. NPS subscribers now wonder if they should increase their equity exposure, maintain the current levels or reduce it.

Having a well-diversified investment mix into all three options reduces the risk and helps you generate a stable return over a period. The recent volatility has proven that investors with equal exposure in all the three options has easily generated well above 9 per cent return on NPS portfolio.

However, a significant market fall also provides an opportunity to take a calculated call by tweaking the investment mix. "Bearish conditions in equity markets require increased allocation to equity as an asset class. Doing so will allow investors to get quality equity exposure at attractive valuations and thereby, fetch higher returns on their equity investments over the long-term," says Arora of Paisbazaar.com.

So if you are an NPS subscriber with at least 10 years away from your retirement and having a good risk appetite you can use this opportunity to enhance your future return. "They should opt for the highest possible allocation to equities under the current market scenario. Depending on their employment profile and age, Tier 1 NPS investors have to invest at least 25 per cent of their contribution in government and corporate bond plans," says Arora of Paisbazaar.com.

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