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NPS Tier-1 Has Outperformed Corporate Debt Funds: Should You Invest?

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oi-Vipul Das

| Published: Thursday, July 15, 2021, 10:30 [IST]

National Pension System (NPS) regulated by Pension Funds Regulatory and Development Authority (PFRDA) is the most common pension scheme due to its higher returns, tax deductions under section 80C, flexibility to choose investment options, and pension fund, and so on. Talking about the higher returns of NPS, the 3 and 5 years returns of all National Pension System (NPS) fund managers’ corporate debt schemes (Scheme C) under Tier I have beaten their mutual fund rivals such as corporate debt funds. Not only the debt mutual fund peers, but the returns of Scheme C Tier-1 have also outperformed the benchmark across the 5 years horizon period. So let’s now discuss the NPS Scheme Tier-1 returns and conclude to invest by comparing NPS Scheme C and Corporate Debt Funds.

NPS Scheme C Tier-1

Over the last three years, HDFC Pension Fund and Aditya Birla Sun Life Pension Fund have been the best players among all NPS Scheme C Tier-1 fund managers. The most current returns can be seen in the table below.

Pension Fund Inception Date AUM (Rs Crs) NAV Returns 1 Year Returns 3 Year Returns 5 Year Returns 7 Year
Aditya Birla Sun Life Pension Management Ltd. 9 May 17 59.45 14.2796 6.24% 10.61% NA NA
HDFC Pension Fund Co. Ltd. 1 Aug 13 3724.96 21.9007 7.10% 11.16% 9.50% 10.12%
ICICI Pru. Pension Fund Mgmt. Co. Ltd. 18 May 09 1780.42 33.3072 6.77% 10.66% 9.30% 10.11%
Kotak Mahindra Pension Fund Ltd. 15 May 09 335.09 32.0209 5.68% 9.40% 8.52% 9.43%
LIC Pension Fund Ltd. 23 July 13 937.96 21.6255 6.50% 10.91% 9.08% 9.86%
SBI Pension Funds Pvt. Ltd. 15 May 09 3495.67 33.4514 6.39% 10.79% 9.27% 9.89%
UTI Retirement Solutions Ltd. 21 May 09 491.14 29.7066 5.41% 10.13% 8.78% 9.53%
Benchmark Return as on 09.07.2021 8.77% 11.66% 9.56% 10.20%v

Best Performing Corporate Debt Mutual Funds

Corporate bond funds are allowed to allocate a minimum of 80% of their holdings in the highest-rated corporate bonds, according to SEBI. These funds put the majority of their capital into AAA-rated corporate bonds which provide higher returns than other fixed-income securities to the risk-averse investors having short to mid-term financial goals. Here are the best performing corporate bonds funds based on higher ratings given by Value Research and returns.

Funds AUM In Rs NAV as of 14 July 2021 1-year returns 3-year returns 5-year returns Rating
Nippon India Corporate Bond Fund 2,663 Cr Rs 47.80 6.71% 8.14% 7.92% 4 star
Kotak Corporate Bond Fund 9,849 Cr Rs 3032.36 5.21% 8.49% 8.23% 4 star
Aditya Birla Sun Life Corporate Bond Fund 24,168 Cr Rs 88.32 5.58% 9.34% 8.47% 5 star
ICICI Prudential Corporate Bond Fund 20,276 Cr Rs 23.84 5.14% 8.83% 8.18% 5 star

Where should you invest?

NPS Scheme C Tier-1 has undoubtedly outperformed the returns of corporate debt funds across the last 3 years and 5 years. On an average basis, NPS Scheme C has delivered a return of 10.52% across the last 3 years and 9.07% across the last 5-years. Whereas according to the date of Value Research, corporate debt funds have also done a pretty decent job.

These schemes have delivered an average return of 7.89% across the last 3-years and the 5-year average return is 7.66%. The comparison is clearly stating that NPS has the potential to give higher returns than the debt mutual funds only if you want to invest for your post-retirement days. The Tier-1 NPS account, as a retirement savings scheme, only allows the subscribers to withdraw the maturity corpus after the age of 60, implying that NPS is a long-term retirement strategy.

On the other hand, corporate bond funds are the best among the debt category if you have a short to mid-term personal finance goal and want higher returns than fixed-income investments like fixed deposits. Credit risk, interest rate risk, and market risk are the three risks linked with corporate bonds. The risk element in the NPS system is typically managed since it enables investment in equities, government bonds, and corporate bonds while maintaining the highest equity exposure at 50-75 percent.

So, with these risk considerations, one may invest in NPS or Corporate Bond Funds based on the investment objectives, and as a caveat, no one can guarantee future results based on past performance.

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Story first published: Thursday, July 15, 2021, 10:30 [IST]