The Government of India introduced the National Pension Scheme (NPS) in the year 2004 solely for Central Government employees so that they can contribute towards a retirement corpus. However, in the year 2009, the scheme was made public for all individuals. Moreover, the Government also introduced an additional tax deduction of up to INR 50,000 if you invest in the National Pension Scheme. This further popularized the concept of NPS and made investors invest in the scheme.
What is NPS?
NPS is a retirement oriented investment scheme which promises you pensions and lump sum benefits on maturity. The scheme is a market-linked scheme where your investments grow as per the market performance so that you get inflation-adjusted returns when you retire.
Who can invest in NPS?
Both Indian residents and NRIs can invest in the National Pension Scheme if they are aged between 18 and 60 years. In case of NRIs, though, the investment would be terminated if the citizenship changes after opening the NPS account.
Investment into the National Pension Scheme
When you choose to invest in the National Pension Scheme, there are two investment accounts which are available. These are as follows –
Tier I Account
Tier I Account is the mandatory account into which you have to invest if you want to invest in NPS. The minimum investment required for Tier I Account is INR 500. This means that you can invest in the NPS scheme with as little as INR 500. Moreover, over a financial year, you have to invest a minimum of INR 1000 into Tier I account to keep it active. If the minimum investment is not done, the account would freeze and you would face a penalty to unfreeze it.Tier I Account does not allow withdrawals till the scheme matures. It, therefore, helps your investments to grow. However, in certain situations which are mentioned below, withdrawals are allowed. The situations include the following –
a. Unemployment for 60 or more continuous days
b. Paying the expenses of a wedding
c. Paying for medical emergencies
d. To buy a home, etc.
Tier II Account
Tier II Account is not mandatory. You can make investments in this account or only if the Tier I Account investment has been done. The minimum investment for Tier II Account is INR 250. Tier II Account is quite flexible. You can make investments anytime and even withdraw anytime. Withdrawals are permitted from Tier II Account freely.
National Pension Scheme Investment Funds
Now that you know the accounts under NPS, let’s understand the returns that the scheme promises. As stated earlier, the National Pension Scheme invests in market-linked funds. There are four investment funds to choose from. They are as follows –
Asset Class A –
This fund invests its portfolio in alternate investment funds which include REITS, MBS and AIFs among others. This is an optional investment fund. If you choose to invest in this fund, the maximum investment would be limited to 5% of your total investment.
Asset Class C –
This fund invests its portfolio in securities which promise a fixed rate of interest. However, the securities do not include Government securities. Since the underlying assets of the portfolio have guaranteed returns, the risk in Asset Class C is very low and the returns are stable. You can invest 100% of your investments in this fund without any restrictions.
Asset Class E –
Under Asset Class E, at least 50% of the portfolio is invested in equity-oriented stocks. The portfolio, therefore, depends on the performance of the stock market. Since the market is volatile in nature, the risk is high. The returns, on the other hand, are attractive since equity promises good returns. When investing in the National Pension Scheme, however, you cannot invest 100% of your money in this volatile fund. The investment would be restricted to 75% and the remainder should be invested in either Asset Class C or G or in a combination of both. Moreover, as you age, your equity investment would reduce to reduce the volatility that your investments would be exposed to.
Asset Class G –
Under this fund, the portfolio consists of only Government securities. These securities are highly secured and offer a fixed rate of return. The fund, therefore, has negligible risks and the returns are moderate and stable. 100% of your investment can be invested in this fund without restrictions.To invest, you can choose either one of Asset Class C or G or a combination of multiple funds. You can also switch between the funds when you want to change your investment preference. There are two investment strategies too to invest your money. These strategies are as follows –
NPS investment strategies:
Active Choice
If you choose Active Choice, you can invest in the above-mentioned funds as per your discretion. However, the minimum and maximum investment limit would have to be followed.
Auto Choice
Under this strategy, your investments are managed automatically depending on your risk profile. There are three risk profiles to choose from and the profile you choose would determine your asset allocation. The profiles and their asset allocations are as follows –
| Risk profiles | Allocation in Asset Class E | Allocation in Asset Class C | Allocation in Asset Class G |
| Aggressive | 75% | 10% | 15% |
| Moderate | 50% | 30% | 20% |
| Conservative | 25% | 35% | 40% |
Thereafter, as you age, the equity exposure from Asset Class E is reduced and redistributed towards the other two Asset Classes.
Switching is also allowed between these two strategies. You can choose the Auto Choice strategy and then switch to Active Choice or vice-versa.
Historic National Pension Scheme Returns
National Pension Scheme returns are not promised as they depend on the performance of the securities into which the scheme has invested in. However, the historic National Pension Scheme returns can be assessed to check how the scheme has performed ever since its inception. So, let’s have a look into the National Pension Scheme return for different types of Asset Classes available under the scheme –
National Pension Scheme returns under Tier I Account as on 31st September 2019
Asset Class A:
| Returns | Name of the Pension Fund Manager | ||||||
| SBIPF* | LICPF** | UTIRSL** | ICICI PF*** | KOTAK PF ^ | HDFC PF ^^ | BIRLA PF^^^ | |
| 3-month return | 2.31% | 1.66% | 1.53% | 2.53% | 3.11% | 1.70% | 1.59% |
| 6-month return | 3.96% | 2.99% | 3.33% | 4.63% | 8.06% | 4.07% | 3.34% |
| 1-year return | 11.48% | 10.41% | 7.26% | 13.32% | 16.19% | 12.74% | 7.32% |
| Return since inception | 8.15% | 7.78% | 6.98% | 7.99% | 7.69% | 8.40% | 7.09% |
Asset Class E:
| Returns | Name of the Pension Fund Manager | ||||||
| SBIPF* | LICPF** | UTIRSL** | ICICI PF*** | KOTAK PF ^ | HDFC PF ^^ | BIRLA PF^^^ | |
| 3-month return | -2.70% | -3.30% | -1.68% | -2.53% | -0.93% | -1.12% | -0.36% |
| 1-year return | 3.94% | 2.26% | 4.44% | 4.21% | 7.19% | 6.67% | 4.80% |
| 3 years return | 9.16% | 7.73% | 9.44% | 9.26% | 9.79% | 10.97% | NA |
| 5 years return | 8.18% | 6.83% | 8.51% | 8% | 8.50% | 9.11% | NA |
| Return since inception | 9.31% | 10.79% | 10.98% | 10.98% | 10.27% | 13.89% | 8.73% |
Asset Class C:
| Returns | Name of the Pension Fund Manager | ||||||
| SBIPF* | LICPF** | UTIRSL** | ICICI PF*** | KOTAK PF ^ | HDFC PF ^^ | BIRLA PF^^^ | |
| 3-month return | 3.29% | 2.90% | 1.79% | 3.02% | 1.77% | 3.25% | 3.34% |
| 1-year return | 14.39% | 14.51% | 12.63% | 14.43% | 12.95% | 14.92% | 15% |
| 3 years return | 8.01% | 7.56% | 7.18% | 8.19% | 7.29% | 8.10% | NA |
| 5 years return | 9.99% | 9.84% | 9.39% | 10.38% | 9.69% | 10.13% | NA |
| Return since inception | 10.57% | 10.21% | 9.29% | 10.58% | 10.29% | 10.42% | 9.88% |
Asset Class G:
| Returns | Name of the Pension Fund Manager | ||||||
| SBIPF* | LICPF** | UTIRSL** | ICICI PF*** | KOTAK PF ^ | HDFC PF ^^ | BIRLA PF^^^ | |
| 3-month return | 2.01% | 1.68% | 2.33% | 1.69% | 1.98% | 1.78% | 1.90% |
| 1-year return | 18.42% | 21.02% | 18.21% | 18.08% | 18.97% | 18.48% | 18.26% |
| 3 years return | 7.87% | 9.46% | 7.39% | 7.63% | 7.69% | 7.67% | NA |
| 5 years return | 10.90% | 11.69% | 10.38% | 10.71% | 10.78% | 10.65% | NA |
| Return since inception | 9.93% | 11.69% | 8.83% | 9.13% | 9.08% | 10.34% | 9.07% |
National Pension Scheme returns under Tier II Account as on 31st September 2019:
Asset Class E
| Returns | Name of the Pension Fund Manager | ||||||
| SBIPF* | LICPF** | UTIRSL** | ICICI PF*** | KOTAK PF ^ | HDFC PF ^^ | BIRLA PF^^^ | |
| 3-month return | -2.62% | -2.90% | -1.75% | -2.49% | -1.04% | -1.13% | -0.16% |
| 1-year return | 3.93% | 2.81% | 4.37% | 4.33% | 7.15% | 6.81% | 4.51% |
| 3 years return | 7.46% | 5.39% | 7.98% | 7.78% | 7.20% | 8.36% | NA |
| 5 years return | 8.19% | 6.64% | 8.63% | 8.04% | 8.52% | 9.28% | NA |
| Return since inception | 8.99% | 7.74% | 9.32% | 9.02% | 9.55% | 11.24% | 8.47% |
Asset Class C
| Returns | Name of the Pension Fund Manager | ||||||
| SBIPF* | LICPF** | UTIRSL** | ICICI PF*** | KOTAK PF ^ | HDFC PF ^^ | BIRLA PF^^^ | |
| 3-month return | 2.59% | 2.54% | 2.10% | 2.96% | 2.78% | 3.32% | 3.13% |
| 1-year return | 13.39% | 14.11% | 12.80% | 14.08% | 13.77% | 14.61% | 13.78% |
| 3 years return | 7.68% | 7.17% | 7.34% | 8.04% | 7.61% | 8.13% | NA |
| 5 years return | 9.77% | 9.22% | 9.44% | 10.22% | 9.68% | 9.39% | NA |
| Return since inception | 10.13% | 9.02% | 9.40% | 10.41% | 9.34% | 9.37% | 8.35% |
Asset Class G
| Returns | Name of the Pension Fund Manager | ||||||
| SBIPF* | LICPF** | UTIRSL** | ICICI PF*** | KOTAK PF ^ | HDFC PF ^^ | BIRLA PF^^^ | |
| 3-month return | 2.30% | 2.38% | 2.05% | 1.68% | 2.02% | 2.06% | 2% |
| 1-year return | 18.12% | 22.75% | 18.37% | 17.76% | 17.67% | 18.70% | 18.46% |
| 3 years return | 7.78% | 10.07% | 7.52% | 7.54% | 7.49% | 7.70% | NA |
| 5 years return | 10.82% | 11.89% | 10.51% | 10.66% | 10.56% | 10.59% | NA |
| Return since inception | 10.02% | 12.15% | 9.65% | 9.23% | 8.84% | 10.75% | 7.52% |
SBIPF* is SBI Pension Fund Private Limited
LICPF** is LIC Pension Fund Limited
UTIRSL** is UTI Retirement Solutions Limited
ICICIPF*** is ICICI Pension Fund Management Company
KOTAK PF ^ is Kotak Pension Fund Limited
HDFC PF ^^ is HDFC Pension Fund
BIRLA PF^^^ is Birla Sun Life Pension Fund
The National Pension Scheme returns are quite good and attractive even for low-risk asset classes like C and G. You can, therefore, invest in the National Pension Scheme to earn good returns on your investments and create a substantial retirement corpus for your golden years. Remember, the earlier you start investing the more the returns that you can get. So, start investing today and secure your retired life financially.
Frequently Asked Questions:
1. Who manages the portfolio of NPS?
NPS investments are managed by authorized pension fund managers. Currently, there are seven pension fund managers which are as follows –
- Birla Pension Fund
- LIC Pension Fund
- SBI Pension Fund
- ICICI Prudential Pension Fund
- Kotak Mahindra Pension Fund
- UTI Retirement Solutions Pension Fund
- HDFC Pension Management Company
2. When does the National Pension Scheme mature?
The National Pension Scheme matures when you reach 60 years of age. You also have the option to defer the maturity age by another 10 years and collect the maturity proceeds when you attain 70 years of age.
3. What happens on the maturity of the scheme?
When the National Pension Scheme matures, you have the option of withdrawing 60% of the accumulated corpus in a lump sum. This withdrawn amount would also be tax-free in your hands and can be used for any type of financial requirement that you have. The remaining 40% of the corpus would then be utilized to pay you annuities. There are nine annuity payment options under the National Pension Scheme and you can choose to receive annuities under any option that you like.
4. Can National Pension Scheme returns be negative?
Yes, if you invest in Asset Class E which invests in equity-oriented stocks and if the market is falling, the returns can be negative. Positive returns are only promised by Asset Class C and G which invest in fixed income securities which do not depend on the volatility of the capital market.
