Retirement
Returns from New Pension System schemes are hugely volatile

Returns from NPS have varied between 12.52% and 1.82% even for bond schemes, since they are market-determined. This is sure to put off savers. Even a massive dose of financial literacy will not help

An analysis of the performance of pension fund managers in the New Pension System (NPS) shows huge volatility in the returns of various schemes and this could put off many savers.

Over the past three years, returns of the schemes for the unorganised sector have varied from 23.51% to -3.15%. This surprising volatility in the returns of NPS, when the investments are supposed to be straitjacketed, will scare away Indian savers, who simply will not associate volatility with a pension plan. This factor alone will ensure that NPS for the voluntary sector will remain a non-starter.

While it is true that NPS returns are market-determined and therefore bound to be volatile, Indian savers, who largely shun equities and mutual funds, would not want to be part of something like this, for a very long time. This would be a big blow to the scheme at a time when the government is set to adopt a new and improved PFRDA Bill into an Act.

The NPS was launched for all citizens of the country, including workers in the unorganised sector, on a voluntary basis, with effect from 1 May 2009. However, returns for the unorganised sector have been abysmal and extremely volatile. In certain cases the schemes investing in government securities and corporate bonds have delivered negative returns. If this is the case, it would be difficult to enlist voluntary subscription for the pension scheme.

For the period 2009-10 and 2010-11, the returns for unorganised sector workers from six fund managers ranged between 12.52% and 1.82% for government securities, 12.66% and 4.02% for corporate bonds, and 25.94% and 7.95% for equity. For the period January 2011 to June 2011, returns on the schemes of corporate bonds and government securities in Tier I & II have ranged from 1.99% to -0.88%.

Six fund managers (UTI Retirement Solutions Limited, SBI Pension Funds Pvt Ltd, IDFC Pension Fund Management Co Ltd, ICICI Prudential Pension Funds Management Co Ltd, Kotak Mahindra Pension Fund Ltd and Reliance Capital Pension Fund Ltd) managed funds for subscribers since May 2009. Each of the fund managers manage three schemes - Scheme E (Equity), Scheme C (fixed income instruments other than government securities), and Scheme G (government securities).

SBI performed poorly in equity schemes, but did well in fixed income schemes, and some like UTI and IDFC did really well only in equity schemes. The spread between the returns of the fund managers for a particular period and scheme was enormous, going to as much as 8% in certain cases. Since this is the nascent stage, we cannot accurately judge the performance of the fund managers. If returns between different funds remain hugely uneven, savers will be scared off.

In equity schemes, from May 2009 to March 2010, in Tier I of the NPS where no withdrawal is allowed, UTI was the best performer with a return of 26%, whereas SBI was the lowest of the six with an 8% return, a huge difference of 18%. In 2010-11, Kotak and ICICI took the lead with a return of 12% and SBI and UTI provided returns of 8% each. In the first quarter of the current financial year, all the schemes have seen negative returns. The performance was more or less similar for Tier II as well.

In Scheme C, for the period May 2009 to March 2010, SBI, ICICI, IDFC and Kotak, delivered a return of 10%, whereas Reliance and UTI delivered returns of 5% and 4%. In FY2010-11, SBI was the best with 13%, whereas IDFC was the lowest at 6.26%.

SBI's continued its good show in government securities as well, with returns of 10% and 12% for the two periods. Returns in 2009-10 were as low as 2% as was the case for UTI and IDFC.  In 2010-11, UTI provided a return of 13% and IDFC was at 7%.

According to NPS guidelines, savers can put money in any of the following schemes.

Asset class E (equity market instruments) - The investment in this asset class would be subject to a cap of 50%. This asset class will be invested in index funds that replicate the portfolio of either the BSE Sensitive index or the NSE Nifty 50 index. These schemes invest in securities in the same weightage comprising an index.

Asset class G (government securities) - This asset class will be invested in central government bonds and state government bonds.

Asset class C (credit risk bearing fixed income instruments) - This asset class will be invested in the following instruments:

(i) Liquid funds of AMCs regulated by SEBI.

(ii) Fixed deposits of scheduled commercial banks.

(iii) Debt securities with maturity of not less than three years tenure issued by bodies corporate, including scheduled commercial banks and public financial institutions.

(iv) Credit-rated public financial institutions/PSU bonds.

(v) Credit-rated municipal bonds/infrastructure bonds.

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COMMENTS

SANTOSH

5 years ago

Very good analysis of NPS. I would welcome if you mention alternatives of NPS too.

REPLY

D A Bhatt

In Reply to SANTOSH 5 years ago

If option is offered, it is better to withdraw from nps. My perception is that even in most favourable conditions it can not deliever more than 3% to 4% return to private subscribers at the time of retirement due to modus operandii and Methamatical/ empirical algorithums adopted by PFMs to deside calculating NAVs of CLASS E,C,G. It appears to be a ULIP having lower srevice charges. This is my perception about NPS.

Bapoo

5 years ago

Do Not Put All Eggs In ONE Basket can be a Mantra for investing in NPS.

D A Bhatt

5 years ago

Ptivate subscribers with autochoise life cycle fund are getting negative return in nps from the day of their entry.Some need based imrovements may be incorporate on priority basis, else future is blink.

Nagaraj

5 years ago

Govt wanted to impose this hugely volatile Pension Fund upon lower/ middle class investors. Because of these drawbacks, Govt. also avoided distributors and advertisements. This has turned blessings for the small investors, as there was no one to recommend the Pension Fund. and hence no takers.!
I donot understand why SEBI did not object to the sale of this poor quality and highly volatile, risky investment !(even after saving huge expenditure !)

R Nandy

5 years ago

With the 3 asset class options given in nps there should also be a fixed return asset class giving returns equal to EPF.All the 3 asset classes given now are volatile in nature.I don,t see any of them useful for a person who will retire in the near term and doesn't want to get exposed to the vagaries of the market.

Utpal Kumar

5 years ago

They are determined to fail this NPS idea till it is designed in such a way that it earn them good commission.

AND TRADING INCOME.

NPS as it is for very long period , and the funds which are invested today or the funds which will be invested in next 10 years will remain in corpus till perpetuity. I see no reason to mark it market at least in GoI bond , and to some extent in Corporate Bonds as well unless issuer defaults.

Rakesh

5 years ago

NPS has failed,
how can Index funds have such huge difference ranging from 12%-2% & i also have doubts on whether at such low cost pension funds can be managed?
Is long term money ,only left to be forgotten by investor, hoping that fund managers would generate aleast decent returns.....

Mehul

5 years ago

NPS is long term investment but initial return data are not so encouraging

Rambabu Shastri

5 years ago

NPS was launched at the wrong time. Had it been launched 30 years ago, you would have probably seen record returns (long term returns) and everyone jumping to get into NPS. However, remember, that stocks are now nothing but over-valued paper and the same are sold daily in stock markets. Stock markets are now a casino, supported by government funds. The NPS was launched at a time when money was needed to prop markets.

audhakar kulkarni

5 years ago

One must keep in mind that this is long term investment plan and the volatility is taken care due to long term investment, our observation so far clearly indicates that returns from long term investments having combination of debt & equity are about 12% and as such one need not get disturbed by present trend.

ujjwal

5 years ago

thank you for the valuable informations...

http://howtobefinaciallyfree.blogspot.co...

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