Amidst the recent downturn in benchmark equity indices, the National Pension System (NPS) is facing challenges, prompting investors to reassess their portfolios. Since September 27, 2024, both the Sensex and Nifty have seen significant drops of over 17% and 18%, respectively, impacting the average annual returns of the NPS. This decline has raised concerns among investors regarding whether to retain or divest their investments.
As of March 1, 2025, the asset under management (AUM) growth rate for the NPS has slowed to 20.3% year-on-year, amounting to Rs 13.83 lakh crore. This deceleration coincides with the downturn in equity benchmarks towards the end of February, affecting market-linked returns. Of the total AUM of nearly Rs 14 lakh crore, approximately Rs 3 lakh crore has been allocated to equity schemes.
### Annual Returns
Recent data from the Pension Fund Regulatory and Development Authority (PFRDA) reveals that the market correction since September has caused the NPS’s annual equity returns to plummet to 1.21% as of March 1. Despite this recent dip, equity schemes have maintained a robust return of 12.35% since inception. Over the past three years, the average returns have stood at 12.28%. Notably, the current annual equity return of 1.21% is notably lower than the average return of 8.41% from NPS investments in corporate bond schemes and 7.2% from investments in Central Government or State Government schemes.
In response to the significant impact on NPS portfolios due to the stock market decline, market experts suggest diversifying investments across various asset classes like debt or government securities. This strategic move offers more stability and balance during market volatility, especially when considering long-term retirement objectives.
Expert Advice and Asset Allocation
Market expert Chirag Muni, Executive Director at Anand Rathi Wealth Limited, emphasizes the importance of setting an asset allocation strategy at a portfolio level amid market uncertainties. Muni notes that NPS funds, being hybrid in nature, face challenges in adjusting equity allocations during market downturns due to the difficulty in determining the precise split between equity and debt holdings. This lack of transparency complicates the realignment process and limits individual investors’ flexibility in adjusting strategies, as liquidity options are restricted post-lock-in.
Investment experts recommend that long-term investors focus on their objectives rather than reacting to short-term market fluctuations. Methods like Systematic Investment Plans (SIP) or Systematic Transfer Plans (STP) can foster disciplined investing, while those with a long-term horizon of seven years or more may consider making partial lump sum investments.
Muni suggests managing investments across different asset classes at a broader portfolio level and maintaining an 80:20 split between equity and debt for a long-term portfolio. Diversifying equity investments across various funds like large cap, mid cap, small cap, and contra dividend funds can help capture growth potential across different market segments while mitigating risks. For debt investments, considering arbitrage funds for those in higher tax brackets or opting for debt instruments like target maturity funds can offer greater liquidity and stability.
NPS Performance and Top Funds
Over the past year, the National Pension System has demonstrated impressive performance across all asset classes, surpassing historical averages. Equity schemes have recorded an average return of 18%, corporate bond schemes 9.4%, and government bond schemes 10.4%. NPS equity funds have delivered returns of up to 16% in the last three years.
Among the top pension funds under NPS, UTI Pension Fund, with an AUM of Rs 3,257 crore as of January 2025, provided a return of 15.80%. Similarly, Kotak Pension Fund yielded a return of 15.58% with an AUM of Rs 2,621 crore in the same period. ICICI Prudential Pension Fund offered a return of 15.41% with an AUM of Rs 17,872 crore as of January 2025. These funds have showcased consistent growth potential for investors.
The National Pension System serves as a valuable tool for tax saving and retirement planning, offering individuals a secure, market-based option to strategize for their future financial security. By investing in NPS, individuals can witness their wealth grow over the long term while benefiting from various tax advantages. This systematic approach to retirement savings typically yields higher returns compared to traditional investment avenues, attributing its success to incorporating equity investments in its portfolio.
