Sensex, Nifty down: NPS AUM growth at 20.3%. Should you relook into your NPS portfolios?

The ongoing downturn in benchmark equity indices has resulted in a decrease in the average annual returns of the National Pension System (NPS). Since September 27, 2024, both the Sensex and Nifty have dropped by more than 17% and 18% respectively. The decline in the Nifty 50 index has impacted long-term gains, causing concern among investors who are now questioning whether to hold onto or sell their investments.

Recent PFRDA data showed the asset under management (AUM) growth rate in the National Pension System (NPS) has slowed to 20.3% year-on-year, reaching Rs 13.83 lakh crore as of March 1, 2025. This decline aligns with a reduction in equity benchmarks in the latter part of February, affecting market-linked returns. Of the total AUM of nearly Rs 14 lakh crore, around Rs 3 lakh crore has been allocated to equity schemes.

Annual returns

According to the latest data from PFRDA, the market correction since September has caused NPS annual equity returns to drop to 1.21% as of March 1. However, since inception, equity schemes have maintained a strong return of 12.35%. Over the past three years, the average returns have been 12.28%. The current annual equity return of 1.21% is significantly lower compared to the average return of 8.41% from NPS investments in corporate bond schemes, and also lower than the average 7.2% annual return from NPS investments in Central Government or State Government schemes.

In light of the significant impact on NPS portfolios due to the recent stock market downturn, market experts recommend diversifying investments across different asset classes, such as debt or government securities. This strategy can provide more stability and balance during market volatility, especially when considering long-term retirement goals.

"With volatility in the market NPs funds have also taken a hit. It is always advisable to set an asset allocation strategy at a portfolio level. Now, investors should reconsider relying on NPS funds, these being a hybrid natured fund faces the challenge of adjusting their equity allocations during market downturns. This is because it is difficult to identify the precise split between equity and debt holdings. This lack of transparency at the portfolio level complicates the realignment process. The With asset management decisions made at the fund level, individual investors lose the flexibility to adjust strategies. Apart from this you will not have the liquidity option as well. In fact, post lock in as well, you will not be able to exit more than 60% of the fund," said Chirag Muni, Executive Director, Anand Rathi Wealth Limited. 

What should investors do?

Experts have suggested that long-term investors should prioritise their investment decisions based on their objectives rather than being swayed by short-term market fluctuations. Utilising methods like SIP or STP can promote disciplined investing, however, those with a long-term perspective of 7 years or more may consider making a partial lump sum investment.

Muni added: "In light of this, a better approach is to manage investments across different asset classes at a broader portfolio level rather than being confined to a single fund’s structure. You can maintain an 80:20 in equity and debt for a long-term portfolio. For your equity investments, diversify across a variety of funds such as large cap, mid cap, small cap, and contra dividend funds, thereby capturing growth potential across different market segments while mitigating risk. Meanwhile, for your debt investments, consider selecting arbitrage funds if you are in the highest tax bracket, or alternatively, opt for debt instruments like target maturity funds which can offer greater liquidity and stability."

NPS past record

The National Pension System (NPS) has seen impressive performance over the past year, with all asset classes delivering strong returns that have surpassed their historical averages. Equity (E) schemes recorded an average return of 18%, corporate bond (C) schemes provided 9.4%, and government bond (G) schemes yielded 10.4%. In the last three years, NPS equity funds have achieved returns of up to 16%.

Top pension funds under NPS

As per data on Value Research, during the specified period, UTI Pension Fund provided a return of 15.80% with an AUM of Rs 3,257 crore as of January 2025. If one had invested in a monthly SIP of Rs 1,000, it would now amount to Rs 43,245 with a SIP return of 12.87%.

Similarly, Kotak Pension Fund yielded a return of 15.58% in the said period, with an AUM of Rs 2,621 crore as on January 2025. A monthly SIP of Rs 1,000 would have grown to Rs 43,176 now with a SIP return of 12.74%.

Additionally, ICICI Prudential Pension Fund offered a return of 15.41% during the same period, and had an AUM of Rs 17,872 crore as of January 2025. If one had invested in a monthly SIP of Rs 1,000, it would now amount to Rs 43,105 with a SIP return of 12.64%.

NPS as tool for tax saving, retirement planning

The NPS is a secure, market-based retirement savings option that allows individuals to plan strategically for their future financial security. By investing in NPS, individuals can experience the growth of their wealth over the long term while also benefiting from various tax advantages. NPS follows a systematic approach to retirement savings and typically provides higher returns compared to more conventional investment avenues such as bank deposits and traditional insurance policies. This outperformance is attributed to NPS's capacity to incorporate equity investments into its portfolio.