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To benefit from stock market turmoil, NPS investors should increase equity allocation

Since NPS is a long-term retirement product, maintaining the asset allocation is the best strategy. However, it makes sense to add more equity (or going overweight on equities) in times like this.

, ET Bureau|
Last Updated: Mar 30, 2020, 11.35 AM IST
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Subscribers should try to benefit from the current turmoil by increasing their equity allocation.
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The current Covid-19 triggered stock market volatility has shaken the confidence of National Pension System (NPS) subscribers. “It is not just the Corona scare. Global economic slowdown, triggered by shutdowns across the world, is another worry,” says Balwant Jain, tax and investment expert. Due to the recent deep cut, the average annualised loss of Tier 1 equity plans for the last 1-, 3- and 5-year holding periods are 31.91%, 5.76% and 1.31% respectively.

Since subscribers usually make monthly contribution to NPS, we extracted current values for investments of Rs 5,000 per month. The average loss for 3 years of regular investments (total investment of Rs 1.8 lakh) is Rs 51,000 and for 5 years (total investment of Rs 3 lakh) is Rs 57,000.

SIP in the NPS equity funds? This is how much you would have lost in past 3-5 years
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NPS subscribers can’t invest only in equities and have to diversify and invest in other asset classes. Luckily the other two common asset classes—government bonds and corporate debt—are doing well now and this has cushioned the loss a bit. However, the average loss for a portfolio of 50% equity, 25% government bonds and 25% corporate bonds is Rs 13,000 after investing judiciously for the last 3 years. Though this value is not negative for 5 year investments, the gain is just Rs 8,000. This means the 5-year SIP return is close to zero despite good returns from government and corporate debt.

Absolute gain over 5 years is low if one considers the Tier 1 combined plan
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Source: Value Research; Data as on 24 Mar

However, this does not mean you should ditch the NPS. The NPS is a market determined product and it is not fair to compare it with fixed return products. The historical returns of market determined products have been volatile. Subscribers have selected a market determined product because it has the ability to generate higher returns in the long term. More importantly, NPS is the lowest cost product from this segment and therefore, it makes sense to remain invested in it.

Should you shift to the debt side of NPS now? That will also be a bad strategy in the current market environment. The debt portion of NPS is also market determined and therefore, will face market vagaries. The low running yield in debt is another problem now. “The 10-year G-sec yield is at a lower level, so there is no point in shifting from equity to debt now. Since the economic situation is not great, the credit crisis will also linger,” says Amit Gopal, Business Leader - India Investments, Mercer Consulting Co. The asset allocation of NPS subscribers might have changed drastically due to deep cut in equities and that needs to be rectified. “Asset rebalancing is very important and investors need to shift from debt to equity to maintain the asset allocation,” says Jain.

Though NPS investments are rebalanced automatically every year, experts say you need to be proactive and not wait for automatic rebalancing. “Automatic reallocation changes happen only on the subscriber’s birthday. So, if their birthday is still some time away, subscribers should do it themselves now,” says Sumit Shukla, CEO, HDFC Pension Funds. Proactive asset allocation changes can be done only twice a year.

Since NPS is a long-term retirement product, maintaining the asset allocation is the best strategy. However, it makes sense to add more equity (or going overweight on equities) in times like this. “If you are young and your risk taking ability is high, this is a good time to increase equity allocation,” says Gopal. If you are below 50, NPS now allows subscribers to increase equity allocations up to 75%.

If you are a medium term investor, the tier 2 is the best option due to various reasons. “NPS is an inexpensive product with a large-cap bias. Since it is a longterm product, fund managers usually don’t take tactical calls,” says Gopal. The large-caps will be the first ones to bounce back in periods like this and the no mid and small cap exposure is a boon for NPS subscribers. No redemption restriction is another advantage of NPS tier 2. “This is a good time to get into equities and tier 2 is the best option for it, because there is no lock-in or exit load on Tier 2,” says Shukla.

Also Read

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How different types of NPS funds have performed

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Tax-exempt employer contribution to PF, NPS capped: Why high earners should opt for VPF, NPS

NPS Lite investors comprise 34% of NPS subscribers, but contribute just 1% of AUM: Survey

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