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Bond crisis? NPS Corporate Bond Funds beat Equity Pension Fund plans comprehensively

Amitava Chakrabarty
National Pension System, NPS, Equity, Government Securities, Corporate Bonds, NPS Tier-1 Account, pension funds

Amidst the noise of repeated bond failures leading to markdown and side pocketing by Asset Management Companies (AMCs), the Corporate Bond Fund plans of National Pension System (NPS) Tier-1 Pension Funds have given an outstanding 1 year performance in 2019.

Started in 2004 to replace conventional pension system of government employees who joined their services on or after January 1, 2004, the contributory pension system of NPS has given a consistent performance over the years with its conservative approach.

Along with compulsory contributions by government employees, people from all sections were allowed to contribute in NPS from 2009.

NPS is regulated by the Pension Fund Regulatory & Development Authority (PFRDA) and is known for its low-cost secured structure.

Investments of the money contributed in various NPS plans are managed by Pension Fund Managers, viz. Birla Sunlife Pension Management Limited, HDFC Pension Management Company Limited, ICICI Prudential Pension Funds Management Company Limited, Kotak Mahindra Pension Fund Limited, LIC Pension Fund Limited, Reliance Capital Pension Fund Limited, SBI Pension Funds Private Limited and UTI Retirement Solutions Limited.

Apart from compulsory contributions that qualifies for tax benefits u/s 80C, voluntary contributions may be made in Tier-1 and Tire-2 Accounts of NPS. Contributions up to Rs 50,000 in Tier-1 accounts in a financial year are qualified for additional tax deduction u/s 80CCD(1B) over and above the 80C limit of Rs 1.5 lakh.

Various investment plans are available under Tier-1 and Tier-2 accounts of NPS that the contributors may choose according to their risk appetite, age and length of investments.

The investment options based on three asset classes are-Scheme E, in which investments are predominantly made in Equity, Scheme C, in which investments are predominantly made in Corporate Bonds and Scheme G, in which investments are predominantly made in Government Securities.

There is also an option of Active Choice, where a contributor can specify the percentage in which his / her money is to be invested in these asset classes.

While Schemes C and G are designed for risk-averse investors, Scheme E is considered ideal for generating higher return in long term.

However, as per the return chart of individual NPS schemes as on 31 December, 2019 available on the website of NPS Trust, Schemes C has outperformed Scheme E, not only in short period of 1 year, but also produced better long-term return in 10 years.

Following tables show return on individual NPS schemes as on 31 December, 2019:

National Pension System, NPS, Equity, Government Securities, Corporate Bonds, NPS Tier-1 Account