2 min read.Updated: 18 Oct 2020, 12:53 PM ISTAvneet Kaur
While NPS was launched to replace the old pension system in 2004 for government employees only, it was opened up for all citizens of the country in 2009
The low-cost structure and the tax efficiency makes it a great investment for retirement planning
Debt schemes of National Pension System (NPS) have given wonderful double-digit returns while the returns from most other fixed income investments are muted. Scheme G of NPS is topping the charts with an average return of 12% in the last one year. Scheme G of NPS invests in government bonds and related securities. It is a low risk investment option. These returns are luring naive investors to invest in such schemes of NPS without understanding the rationale. Before we proceed to if you can expect similar returns in future as well, its imperative to know distinguishing fetures of NPS. It is a low-cost retirement product offered by the government.
While NPS was launched to replace the old pension system in 2004 for government employees only, it was opened up for all citizens of the country in 2009. The low-cost structure and the tax efficiency makes it a great investment for retirement planning.
Let's brush up the basics, bond yields and prices of the bonds have an indirect relationship. As yields move down, prices of existing debt schemes go up, and these securities become more favorable due to higher interest rates. That means, the NAV of the debt scheme goes up when the yields of securities go down and vice versa.
This fundamental theory explains the double-digit returns in the Scheme G of NPS in the last one year or so. The benchmark 10-year G-Sec yields have gone down from 6.70% to 5.94% which favored the government scheme portfolio of NPS. Scheme G of NPS is giving an average return of 12% in the last one year. These are point to point to returns.
HDFC Pension Management Fund has been the best performer in the last one year with 13.43% returns, followed by LIC Pension Fund which has delivered 12.49% returns and ICICI Pru Pension Fund Management with 12.25% returns in the same time period.
Apart from the government bond scheme of NPS, long term debt mutual funds-- gilt funds, long duration debt funds, corporate bond funds, etc. are also giving great returns due to the fall in bond yields.
Should you expect similar returns from NPS schemes in future?
NPS is a market-linked product. The returns in NPS schemes will be volatile. The returns could be lower or even higher that those offered currently. However like any other long term investment, the advise remains the same. Focus on your goal and do not get carried away by the short term volatility. Do not blindly move from equity to these debt instruments by merely by looking at the superior returns at this point. Understand the product well. Don't invest in NPS only for returns. The aim of this investment should be to save for your retirement for a long term. NPS offers various investment options- equity, corporate bond, government securities and alternative investment funds.
It also allows to invest in a mix of asset class. While deciding to invest in NPS, apart from looking at the performance of various schemes, match your risk profile with the schemes on offer.
NPS as an investment product is continuously evolving. Soon it is going allow investors to invest via SIP as well. NPS is also looking at bringing out a guaranteed return product by this fiscal end.