NPS investments: REITs, InvITs in focus as Scheme A posts stellar returns in one year

Despite subdued equity markets, Scheme A within the National Pension System (NPS) Tier-I account has delivered a standout annual return of up to 25 per cent in the past year. This high-risk, niche component is strictly capped at a 5 per cent allocation for subscribers under the active choice option. Investments are mainly in Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and Additional Tier-1 (AT1) bonds, offering exposure to asset classes typically out of reach for retail pension investors. However, the fund's limited scale, concentration in a few top-performing securities, and regulatory constraints raise important considerations for risk and portfolio construction.

All 10 NPS pension fund managers offer Scheme A, but its corpus remains small at approximately ₹800 crore, with over five lakh subscribers. The largest manager, HDFC Pension, holds around Rs 450 crore, while SBI Pension and ICICI Pru Pension follow with Rs 130 crore and Rs 112 crore, respectively. This limited size has resulted in highly concentrated portfolios. Tata and UTI pension funds each allocate more than 80 per cent of their Scheme A exposure to a handful of REITs and InvITs. Others such as LIC Pension (62 per cent) and Aditya Birla Sun Life (47 per cent) prefer AT1 bonds.

The one-year returns have been propelled by sharp rallies in specific securities. Top-performing funds like UTI Pension and Tata Pension posted 25 per cent and 18 per cent gains, respectively, largely due to Mindspace Business Parks REIT (up 25 per cent), Brookfield India REIT (up 19 per cent), and IndiGrid Infrastructure Trust (up 18.5 per cent). The broader investible universe for Scheme A has delivered mixed results, with some holdings experiencing declines of up to 5 per cent over the past year.

Underlying these returns is a significant concentration and regulatory risk. Of the 17 listed InvITs and five REITs in India, Scheme A funds have invested in only six InvITs due to rating requirements—AA or higher from at least two agencies. This narrows the investible universe and leaves portfolios heavily reliant on a small set of names. In some cases, the top two or three holdings account for nearly 80 per cent of assets, heightening sensitivity to individual security performance.

Scheme A: What all funds are included

Scheme A is predominantly exposed to three asset classes: AT1 bonds, REITs, and InvITs. AT1 bonds, while offering yields roughly 100 basis points above government securities, pose considerable risk as coupon payments can be suspended or written down, as seen during the Yes Bank crisis in March 2020, when a ₹2,800-crore AT1 bond write-off impacted various institutional investors. REITs and InvITs generate income from real estate leases and infrastructure assets, but remain sensitive to macroeconomic cycles and liquidity events.

Rolling return data since 2016 for UTI Pension’s Scheme A demonstrates the strategy’s inherent volatility, swinging between -1.4 per cent and +25 per cent on a one-year rolling basis. Over a seven-year horizon, the annualised point-to-point return for the category is 8.8 per cent, closely matching average debt mutual fund returns as of August 29, 2025. This suggests that, while high short-term gains are possible, long-term returns may stabilise closer to traditional fixed income products.

Regulatory features are central to Scheme A's design. It is only available within Tier-I NPS accounts, and the exposure cap of 5 per cent at the subscriber level limits potential losses from asset-specific shocks. The active choice option is required for access, as the auto allocation does not include Scheme A. This framework aims to contain risks arising from the fund’s concentrated and volatile profile.

Investing in Scheme A

While the scheme offers diversification into new asset classes for risk-tolerant investors, industry professionals advise caution. The regulatory cap of 5 per cent on Scheme A ensures that even if things go wrong, the damage to your retirement portfolio remains limited. Scheme A may hold value for investors with higher risk tolerance, especially those who have already maxed out the 75 per cent equity allocation permitted under NPS. For such investors, adding a small slice of Scheme A provides exposure to newer asset classes like REITs and InvITs. For most conservative and moderate investors, experts recommend maintaining limited exposure, favouring equity and debt allocations within the NPS structure.