National Pension System (NPS) investors reviewing performance on NPS Divas will find that returns have been weak over the past year. Category E (equity) schemes delivered an average return of \u20134.53 per cent, category C (corporate bonds) 4.60 per cent, and category G (government bonds) 2.60 per cent. Investors should assess whether this weakness calls for a change in fund manager or patience with their existing choices.\u00a0<\/p>\n
Why returns were weak\u00a0<\/p>\n
Weak equity markets explain the disappointing returns from NPS equity funds. The Bombay Stock Exchange (BSE) Sensex fell 9.81 per cent over the past year. The 10-year bond yield rose from roughly 6.56 per cent a year ago to 7.16 per cent. \u201cRising bond yields have affected fixed-income returns,\u201d says Deepesh Raghaw, Securities and Exchange Board of India (Sebi)-registered investment adviser.\u00a0<\/p>\n
\u00a0<\/p>\n
Investors should not worry unduly about one year\u2019s poor returns. \u201cAn underperformance of up to two\u2013three years can happen in a retirement product like NPS that is meant to be held for 25\u201330 years,\u201d says Arnav Pandya, founder, Moneyeduschool.\u00a0\u00a0<\/p>\n
Avoid knee-jerk reactions. \u201cIf asset allocation remains appropriate for retirement goals and risk tolerance, a weak one-year return alone may not warrant action,\u201d says Saurabh Bansal, founder, Finatwork Investment Advisor.\u00a0<\/p>\n
Only four out of ten equity fund managers beat the benchmark over the past year. Experts say a year is a short period for evaluating a pension fund manager. \u201cFive- or 10-year performance provides a more meaningful picture,\u201d says Bansal.\u00a0<\/p>\n
Consistent underperformance against the benchmark, however, warrants attention. \u201cIn that case, investors may want to look at other, more consistent fund managers,\u201d says Pandya.\u00a0<\/p>\n
DSP\u2019s fund was the worst performer over the past year, with a return of \u20137.25 per cent. Investors should not attach too much significance to a single weak year. \u201cIt just reflects that the strategy the fund manager was following did not work out during that period,\u201d says Raghaw.\u00a0<\/p>\n
DSP Pension Fund also has a short track record. \u201cThe limited history makes it difficult to draw a strong conclusion,\u201d says Bansal. Investors should monitor the fund\u2019s performance.\u00a0\u00a0<\/p>\n
Return gap narrows\u00a0<\/p>\n
The gap between the best and worst equity fund performers is 4.77 percentage points over one year but narrows to 1.36 percentage points over 10 years. Greater short-term volatility in equities leads to wider differences in performance, which tend to narrow over longer periods.\u00a0<\/p>\n
Kotak\u2019s fund ranks ninth over one year but second over seven years. The narrowing return gap and changes in rankings argue against switching based on short-term performance alone.\u00a0<\/p>\n
\u201cBe patient with the fund house, manager and strategy. Repeated switches based on one-year performance can produce negative surprises over the long term,\u201d says Raghaw.\u00a0<\/p>\n
\u201cInstead of focusing on investing in the fund with the highest return, focus on being in a consistent fund,\u201d says Pandya.<\/p>\n
Assess performance through rolling returns rather than point-to-point returns. If you use point-to-point returns, consider a period of at least five years. \u201cFailure to recover over five years suggests a problem with the manager\u2019s approach,\u201d says Raghaw. Such persistent underperformance may warrant a switch to a more consistent fund.\u00a0<\/p>\n
Assess strengths across asset classes\u00a0<\/p>\n
A fund house may manage its equity fund well but lag in corporate bonds or government securities fund, or vice versa. \u201cEach asset class requires different skills,\u201d says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.<\/p>\n
Examine each pension fund manager\u2019s performance across schemes to identify its strengths. \u201cDo not select a pension fund manager solely on equity or debt returns,\u201d says Kumar. Raghaw suggests choosing a different manager for E, C and G to tackle this issue.\u00a0\u00a0<\/p>\n
Understand category G performance\u00a0<\/p>\n
Only one category G fund outperformed the benchmark over the past year. \u201cMany of these funds may be holding longer-dated securities. When the market falls, longer-dated securities are impacted more than shorter-dated ones,\u201d says Pandya. Longer-dated securities fit in category G of a pension fund because NPS is a long-term product.\u00a0<\/p>\n
Investors need not act on this underperformance. \u201cPerformance is likely to improve once the rate cycle turns,\u201d says Pandya.<\/p>\n
When should you switch?\u00a0<\/p>\n
Use rolling returns or calendar-year returns to decide whether to switch. \u201cConsider switching within a category only if the pension fund manager consistently underperforms the benchmark and peer group over a multi-year period. Poor risk management or a persistent shift in investment style that does not align with the investor\u2019s risk profile may also justify switching,\u201d says Kumar.\u00a0<\/p>\n
Avoid frequent switches because historical performance does not guarantee future results. Relative performance can reverse after you move from one manager to another.\u00a0<\/p>\n
Allocation, fund selection\u00a0\u00a0<\/p>\n
Financial planners say the importance of selecting the right funds may be overstated. \u201cAsset allocation matters more than fund selection, so make informed decisions in this regard. Moreover, asset allocation is within your control, while fund performance is not,\u201d says Raghaw.\u00a0<\/p>\n
When selecting a fund, focus on its long-term track record rather than recent returns. \u201cConsider expense ratios. Assess consistency across different market cycles. Choose a pension fund manager that has demonstrated steady risk-adjusted returns over five to 10 years,\u201d says Kumar..<\/p>\n
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