The National Pension System (NPS) has been in the spotlight lately, with the Pension Fund Regulatory and Development Authority (PFRDA) allowing investors to choose their fund managers for the selected schemes. The decision has created curiosity about the best equity fund managers, as the NPS equity schemes have historically delivered robust returns, albeit with a higher risk than debt and alternative investment instruments.

For starters, NPS is a government-sponsored retirement plan offering two account options: Tier 1 is a pension scheme with restricted withdrawals until age 60, and Tier 2 works as a regular investment tool with no withdrawal restrictions. In Tier 1, a part of the contribution is kept for pension. Tier 2 is not mandatory, but one can open it only if they have a Tier 1 account.

Why NPS & What Is E Tier 1?

NPS stands out as an affordable pension product, with an annual investment management fee of just 0.01 per cent, making it one of the most cost-effective retirement planning options.

When enrolling in the NPS, subscribers must select a pension fund manager (PFM) and specify their investment preferences. They can choose asset classes like equity, corporate debt, government bonds, and alternative investment funds.

NPS has the ‘Auto’ and ‘Active’ investment options. In the active mode, investors can control their contributions, allowing them to choose how much they want to invest in the selected assets. Equity (E) assets are ‘high-risk-high-return’ instruments, as they can suffer from market volatility in the short term. In the long run, they can deliver good returns. The maximum permitted equity investment varies based on age, at 75 per cent for those under 50 years and gradually decreasing with age, eventually reaching 50 per cent for individuals aged 60 and above.

NPS Returns From Equity Investments

The average returns of pension fund houses in NPS’s equity investments stand at 13.7 per cent over 10 years and 14.4 per cent over five years.

For instance, investing Rs. 10,000 monthly in equity schemes through a pension fund house over 10 years could have grown to approximately Rs. 26.2 lakh. It will offer an estimated monthly pension of Rs. 5,242 from a total investment of Rs. 12 lakh.

Out of the entire corpus of Rs. 26,20,914, an expected lump sum withdrawal of Rs. 10.4 lakh and Rs. 15.7 lakh for annuity is shown on the NPS website with the help of a calculator.

The pension funds’ 10-year returns show that HDFC Pension Fund leads with a solid 14.3 per cent, closely followed by Kotak Pension Fund and ICICI Pension Fund at 14 and 13.9 per cent,

respectively. Over five years, Kotak leads with 15.3 per cent, followed by ICICI PF and HDFC PF, showing 15.2 per cent and 14.9 per cent, respectively.

Benchmarks slightly exceed the category averages at 14.2 per cent and 15.2 per cent for 10 and 5 years, respectively, and have beat most funds.