If the Indian equity market has something to boast about is its returns. The equity markets have delivered superior returns than any other asset class over time. It was probably one reason the National Pension System (NPS) trust offers scheme E, which focuses on investment in equity. However, most schemes from this space have underperformed the benchmark.
Lagging The Benchmark
It is always disheartening to see your investment underperform, be it stocks, mutual funds, or pension funds. It is okay if your fund’s underperformance is an aberration, but when it becomes regular, it’s time to take action. According to data released by NPS Trust on its portal, most equity schemes in Tier-I (Scheme-E Tier-I) have underperformed their benchmark on a 10-year basis. Of the four schemes that have completed 10 years, only one has outperformed the benchmark and that too with a very narrow margin. Fund managed by retirement solution has delivered 13.01 per cent return while the benchmark returns stand at 12.99 per cent. The other three funds, managed by ICICI Prudential Pension Fund, Kotak Mahindra Pension Fund, and SBI Pension Fund, have delivered 12.77, 12.89, and 12.64 per cent, respectively, as on December 30, 2022.
When we dug deeper into the numbers, the result was not very different. On a seven-year basis, of the six schemes, only one has outperformed the benchmark. The scheme managed by HDFC Pension Fund Management delivered 13.91 per cent against the benchmark return of 13.77 per cent.
The situation of underperformance is even worse on a three-year and five-year basis. All the schemes have underperformed the benchmark. On three years basis, the benchmark has delivered 12.36 per cent, while the average return from all the schemes stands at 11.15 per cent. On three years basis, the average return stands at 14.84 per cent, while the benchmark return is 15.95 per cent.
Why A Scheme Underperforms
Various factors affect performance. The primary factor is portfolio composition, as the performance of underlying assets reflects the scheme's performance. Another factor is fund management charges. These charges are less of a concern for investors in the NPS schemes as they are lower than other financial products. There are four slabs defined for the fund management charges. The first slab is up to Rs 10,000 crore, where the maximum investment management charge is 0.09 per cent. The next slab is Rs 10,001-50,000 crore, where the cost is 0.06 per cent, and for the following two slabs, Rs 50,001-1,50,000 crore and Rs 1,50,000 crore and above, it is 0.05 per cent and 0.03 per cent.
Should You Worry?
Experts time and again suggest that one should regularly review the performance of your investment at least twice a year. Experts, at the same time, also suggest that don’t judge equity performance on a short-term basis. So on a long-term basis, though these schemes have underperformed the benchmark, the difference in underperformance is not huge. Hence, it should not be a concern for investors unless it is huge.
