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Under the supervision of the Pension Fund Regulatory and Development Authority (PFRDA), National Pension System (NPS) is a retirement scheme available for all citizen models. The National Pension System (NPS) has four asset classes, including Asset Class A, which invests in assets like Commercial Mortgage-Backed Securities (CMBS), Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs), Asset Class C, which invests in corporate bonds, Asset Class G, which invests in central and state government bonds or Government Securities, and Asset Class E, which invests in equities or stocks. You can choose your own asset allocation using NPS’ Active Choice or by using Auto Choice, where your account will be operated by the fund managers. If a subscriber selects Active Choice, he or she can choose the percentage of funds to be allocated to certain asset classes, such as E, C, and G, but the allocation to equity should not surpass 75%. If a subscriber chooses Auto Choice, the lifecycle fund will determine the percentages of assets allocated based on the subscriber’s age. But while we’re talking about how the NPS investment scheme A operates, let’s examine how Asset Class A operates and the risks associated with it.Â
What is NPS Scheme A?
Sreekanth Nadella, MD and CEO of KFintech, responded when asked about NPS Scheme A that “Scheme A of NPS was introduced to expand the investment horizon for the subscribers, especially the retail investors. However, due to its lower percentage of asset allocation threshold and being new to the investment market, Scheme A failed to perform well since its inception. Despite being in operation for more than four years, Scheme A’s total assets under management (AUM) are only Rs.81 crores (as of May 2021), accounting for approximately 0.2 per cent of the whole AUM of Rs. 49,187 crores. Even after that, the NPS managers invested more in Additional Tier (AT1) perpetual bonds than other alternative funds. Although the AT1 bonds offer higher returns than most other bonds, it has a complex investment structure and involves higher risks. On top of that perpetual bonds also have some restrictions which proved a hindrance for NPS investors.”
He further added that “The funds for NPS Investment Scheme A are invested in Alternative assets like REITs and InVITs. Depending on your future financial goal, you can determine your asset allocation. Every asset class comes with an investment limit. For instance, investors can invest up to 5% of their corpus into an alternative asset or Scheme A. Since NPS investments are linked to the market, the returns vary. However, if you are ready to take high risk against a high return, Scheme A should be your call.”
What are the restrictions on perpetual bonds?
Sreekanth Nadella said “The NPS managers have restrictions on the kind of ATI bonds they choose and the amount of corpus they can invest. Besides, NPS managers avoided investment in AFI bonds as the minimum investment in AFI is close to Rs.1 crore which is a real problem for small-sized Scheme A. Likewise, most AFIs are unlisted and therefore it is difficult to value them. The illiquidity of AFI bonds and a lock-in period of long 7 years are other reasons the fund managers are reluctant to invest in Scheme A.”
Should one invest in NPS Scheme A?
Sreekanth Nadella claims, “Although AFI bonds have a higher risk appetite, they generate a high yield. Moreover, small retail investors can also explore a new investment universe if they choose Scheme A of NPS. Therefore, if investors with high-risk profiles want to generate a higher return, they can contribute 5% of their corpus in Scheme A of this central government pension scheme. However, before that, they need to have a clear idea of this relatively new investment arena, including its pros and cons.”
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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