Is it wise to move towards PPF, EPF amid falling NPS return — explained

NPS scheme: The National Pension System (NPS) scheme guarantees high returns on investment. However, there are high chances of market fluctuation where NPS account holders become nervous and have second thoughts. As equity returns over the past few years have not been attractive, equity account in NPS has also got hit in this period. However, NPS subscribers need not to worry about this drop-in returns. The risk-return profile of NPS has undergone a massive transformation. So investors have been granted a broader canvas for asset allocations.

Stock market connect

On why NPS return has fallen in recent times, Sreekanth Nadella, MD and CEO, KFintech said, "Over the past few years, the equity funds have been experiencing negative returns. Like mutual fund investments are subject to market risks, NPS investments are experiencing the same. As a result, the National Pension System subscribers have also become anxious. It is found that various active NPS managers follow a multi-cap strategy by investing in stocks outside the Nifty. So whenever the stock market leans towards large caps, it is evident that the equity funds are bound to underperform."

The KFintech expert went on to add that there is not much for NPS subscribers to worry and panic about. The crashing and underperformance of equity schemes are occurring mainly because of the recent large-cap bias of the stock market.

Should you switch to PPF, EPF

"The volatility of NPS is usually compensated by the debt segment of the National Pension System. Nevertheless, it did not succeed in acting as a cushion this time as the debt segment fared poorly. With such a dreadful situation, many investors were drawn toward EPF and PPF. These provident fund schemes were providing a considerably higher rate of interest than NPS."

Advising investors to compare apple with apple, Jitendra Solanki, a SEBI registered tax and investment expert said, “NPS is a mix of equity and debt and it is for one's retirement fund accumulation. But, PPF account may be or may not be aimed for retirement fund accumulation as it matures after 15 years of account opening date.”

Similarly, Solanki advised investors not to compare EPF interest rate with NPS return as EPF is also a 100 per cent debt instrument like PPF and it is mandatory as well. However, one can opt voluntary provident fund (VPF) to add more monthly contribution in one's EPF account. He advised investors to have a diversified portfolio and keep exposure in all three — NPS, PPF and VPF.

Market trends in past few months

The equity funds of the National Pension System have considerably underperformed the Nifty. Here is a comprehensive listing of the market trends of mid-caps and small-caps of NPS:

However, the long-term investment policies yielded more negative returns. Here is a listing of all the 3 and 5 years investment:

Fall in NPS return is temporary

You need to treat NPS just like a systematic investment plan. It is because the low expense ratio will considerably help in boosting the long-term performance. So you must increase allocations to NPS because of the underperformance of both the debt and equity market.

As you have the privilege of changing your asset allocation twice a year, you can boost the NPS return rate. Moreover, you can invest up to 75% in equity and contribute to increasing and balancing the return rate.