Bond Market helped NPS Higher Returns

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Bond Market helped NPS Higher Returns





The NPS funds have given double-digit SIP returns since their launch.
But this is more due to the rally in bonds than the bull run in equities.

 

They came late but NPS investors have finally joined the party. Since the time the NPS was launched, SIP returns of the schemes for central and state government employees have generated better returns than the Provident Fund. The average NPS fund for Central government workers has given 10.35% returns, while the average state government scheme has delivered 10.84%. The calculation is based on SIP returns on monthly contributions. This should be music to the ears of the estimated 36 lakh government employees (14 lakh Central government and 22 lakh state government) who have nearly `53,500 crore invested in the NPS.

But the higher returns have come with higher volatility. The NPS funds did very well in 2012-13, with Central government funds delivering 9.8% and state government funds giving 11.82%.This was followed by very poor returns in 2013-14. As bond yields shot up, NPS funds that had a large portion of their corpuses in government securities suffered. The SIP returns of the average Central government fund was 5.4% while the average state government fund grew only 4.9%. The 18% returns from equities that year didn't help much because these funds have only a small portion of their corpus in stocks. They are allowed to invest up to 15% in equities but no pension fund manager has allocated even 10% to stocks. As on 30 November 2013, the Central government scheme of SBI Pension Fund had only 7.15% of its corpus in stocks while the fund managed by UTI Retirement Solutions invested only 7.72% in equities.

The trend of poor returns reversed in 2014-15, when bond yields receded.The 10-year benchmark bond yield has moved down from 9.1% in April 2014 to around 7.8% by the end of the year, pumping adrenaline into gilt schemes.The average SIP return of the gilt funds in 2014-15 is close to 22%, better than the 20% delivered by the equity funds.

In the NPS segment for the private sector, the E class (equity) funds have done very well with average SIP returns of 14.6% since their launch in May 2009. But the cap of 50% on equity exposure means even the most aggressive investor (with the maximum 50% in stocks) has managed to earn only 12.5% returns. We have looked at the returns of four different types of investors in the past three financial years and since launch (see tables).

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