NPS equity funds see low single-digit returns in 1 year. Is it time to review your retirement strategy?

Economic Times

29-07-2025

ETMarkets.com National Pension System equity funds show low returns this past year. Experts blame market conditions and NPS structure.
NPS equity funds have delivered low single-digit returns over the past year and according to market experts, this underperformance can be attributed to the current neutral market phase impacted by geopolitical tensions, as well as the structural limitations of the NPS framework.
'The market right now is in a neutral phase, impacted by geopolitical crisis, US tariff expectations and weak earnings in key sectors such as IT and financials, both of which form a significant portion of NPS equity portfolios. Another thing to keep in mind is the structure of NPS itself,' Arjun Guha Thakurta, Executive Director at Anand Rathi Wealth Limited shared with ETMutualFunds.
Also Read | Smallcap mutual funds dominate return charts in 5 & 10 years. What's driving the surge?
According to the structure of NPS, about 20-25% of the portfolio is mandatorily in debt, which typically won't go beyond 7–8% returns therefore, the real growth engine is the 50-75% in equity, and that's been playing around market volatility lately. 'Also, since most NPS equity funds invest heavily in large caps, nearly 70% of the portfolio, they miss out on the higher growth potential that mid and small caps have delivered over time. Together, these factors have resulted in lower returns,' he added.
Out of 10 NPS fund managers, nine have offered upto single-digit returns, one delivered negative return in the same period, according to data provided to ET by Value Research. DSP Pension Fund, relatively a new entrant, has offered the highest return of around 8.90% in the last one year. Kotak Pension Fund offered a return of 3.90% in the last one year period. Three fund managers - HDFC Pension Fund, ICICI Prudential Pension Fund, and UTI Pension Fund offered 2.52%, 2.22%, and 2.17% returns respectively in the said time period.
LIC Pension Fund and ABSL Pension Scheme offered 1.88% and 1.39% returns respectively in the last one year. Axis Pension Fund and Tata Pension Management offered 0.93% and 0.83% returns respectively in the said period. And lastly, SBI Pension Fund offered a negative return of 1.15% in the said period.
Post looking at the performance of NPS equity funds, should one consider rebalancing their asset allocation and what is the ideal time to hold onto equity investments in NPS to potentially see meaningful growth, Thakurta recommends that a better approach is to manage the overall allocation at a portfolio level as this allows an investor to align their equity and debt exposure with your goals, investment horizon and risk appetite more effectively.He further adds that NPS can be compared to a hybrid fund with a lock in, where you don't have full control over asset allocation along with compromised liquidity. In NPS, the subscriber is required to decide investment choice whether active choice or auto choice. In active choice, a subscriber has the right to actively decide as to how the contribution is to be invested based on their personal preference. In this, subscribers can select multiple asset classes under a single pension fund manager. Upto 50 years of age, the maximum permitted equity investment is 75% of the total asset allocation. From 51 years and above, maximum permitted equity iInvestment differs. Percentage contribution value cannot exceed 5% for Alternative Investment Funds. The total allocation across equity and related instruments, corporate debt and related instruments, government bonds and related instruments and alternative investment funds including instruments like CMBS, MBS, REITS, AIFs, Invlts etc asset classes must be equal to 100%On the other hand, in auto choice, the investments will be made in a life-cycle fund and the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio.
Also Read | Consistent performers: Over 40 equity mutual funds offer over 15% CAGR in 3, 5, 7 and 10 year horizons
NPS is focused on saving for retirement whereas mutual funds help investors to plan for different financial goals. The NPS scheme has a certain maturity period of 60 years and withdrawal restrictions. Mutual funds offer a lot more flexibility and ELSS mutual funds come with a three-year lock-in. These funds have a minimum lock-in period amongst various tax saving options available under Section 80C.As other retirement savings options are also available, Thakurta advices investors to definitely consider other options as it's better to control their asset allocation at a portfolio level, where they can divide their money into three baskets, with a mix of equity and debt as they have a low correlation with each other. For equity, investors can consider equity mutual funds from diversified categories and for the long-term basket, meant for retirement, can have an 80:20 mix of equity and debt, the expert advised.He further adds that the medium-term basket, for the longer-term needs, can be 70:30 in equity and debt and the short-term basket should be fully in debt, meant for any near-term expenses as this way, one gets the flexibility to manage short-term liquidity while also generating wealth over the long term through the power of compounding.NPS is a market-linked defined contribution scheme that helps you save for your retirement. The scheme is simple, voluntary, portable and flexible. It is one of the most efficient ways of boosting your retirement income and saving tax. It allows you to plan for a financially secure retirement with systematic savings in a planned way, according to the NPS Trust website.Looking at how the macro environment is evolving, with GDP growth at 6.5% for FY25 and projected to rise to 6.6% next year, inflation well under control, and strong tax collections, it is clear that the market is on a healthy growth path and in this context, NPS may not be the most efficient vehicle to benefit from this momentum, Thakurta mentioned. He further informs that most NPS equity funds tend to stick to large cap allocations and have a fixed structure, which limits flexibility and the ability to optimise returns and there is also the lock-in until retirement and the compulsory annuity purchase, which can restrict an investor's options. 'Mutual funds, in contrast, offer liquidity, a wide choice of categories and the flexibility to adapt to changing market cycles. For long-term investors, mutual funds are better suited to help generate wealth over the long term,' he added.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on [e-mail] alongwith your age, risk profile, and Twitter handle.