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NPS 1-year returns in high teens. Should you invest?

A sustained decline in bond yields has pushed up NPS returns. Gilt funds earned 17-20% in past one year.

, ET Bureau|
Jun 24, 2019, 06.30 AM IST
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Salaried investors who are not happy with 7.5% from the PPF have an option to earn up to 8.65%.
Debt mutual funds may be facing a storm, but investors in debt funds of the NPS are on cloud nine. As bond yields head southwards, gilt and corporate debt funds of the NPS are churning out spectacular returns. The best performing Tier I gilt fund of the LIC Pension Fund has risen 20% in the past one year. The average return from gilt funds is in high teens. Corporate debt funds have also done well, churning out an average 12.5% returns in the past one year. The Birla Sun Life Pension Scheme is the best performer with 12.97% growth in the past one year.

This stellar performance follows an extended phase of low returns. After demonetisation, bond yields rose from below 7% in early 2017 to over 8% in mid-2018. Between January 2017 and June 2018, the average annualised return from the NPS gilt funds was barely 1%. Corporate debt fund returns were marginally better at about 3% during this 18-month period.

Investors who want to join the bond fund party now should note that when yields are low, future returns from bond funds are not very high. As bond yields have dropped below 7%, the returns in the coming months will be fairly muted. Keep this in mind if you are contemplating tweaking the asset mix of your NPS corpus.

Returns earned by different types of investors in NPS

AGGRESSIVE ASSET MIX: 20% Gilt funds | 30% Corporate bond funds | 50% Equity funds

BALANCED ASSET MIX: 33.3% Gilt funds | 33.3% Corporate bond funds | 33.3% Equity funds

CONSERVATIVE ASSET MIX: 50% Gilt funds | 30% Corporate bond funds | 20% Equity funds

ULTRA SAFE ASSET MIX: 60% Gilt funds | 40% Corporate bond funds | 0% Equity funds
Figures are blended returns for four different types of investors; best performers have been highlighted; Data as on 18 Jun 2019 | Source: Value Research

Also, though NPS funds have done very well, the point-to-point growth does not reflect the actual returns earned by investors. Most investors in the NPS contribute to the scheme in monthly SIPs. The returns also depend on the investment mix chosen by the investor. This is why ET Wealth looks at blended returns of four different combinations of the equity, corporate debt and gilt funds. We also looked at the SIP returns earned by these four types of investors.

While NPS investors are smiling, the decline in bond yields is bad news for investors in the PPF. The PPF interest rate is linked to 10-year government bond yield, which has averaged 7.25% in the past three months and is now below 7%. Investors should brace for a possible 50 bps reduction in the PPF interest rate to 7.5%. Even so, the post-tax return of the tax-free PPF will still be higher than what the fully taxable bank deposits offer.

PPF rate poised for reduction
Average bond yield in Apr-Jun quarter was 7.25%

Source: Value Research

Salaried investors who are not happy with 7.5% from the PPF have an option to earn up to 8.65%. They can simply increase their contribution to the Provident Fund through the Voluntary Provident Fund. The PF rate has stayed above 8.5% for the past several years and is unlikely to be cut.

Also Read

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Investing in NPS to cost more. Here's why

How to put money into your NPS account

Ministries told to set up panel to ensure prompt crediting of NPS contributions

How NPS funds have performed

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