MF Investment Capped by PFRDA; How Will it Affect Your NPS Investment?

As a National Pension Scheme (NPS) investor, you should be aware that the pension regulator PFRDA (Pension Fund Regulatory and Development Authority) has put a limit on the extent of the corpus that the pension fund managers can put into mutual funds as a part of equity corpus. The fund managers will not be able to park more than 5 percent of their corpus in MFs as equity and no investment fee can be charged on it.

How do equity investments work in NPS?

One invests in NPS for higher returns compared to say PPF, as it has a higher exposure to the stock market. A subscriber is allowed to put up to 50 percent of their money in equity fund (the rest goes into government securities and other fixed-income instruments). The investment in NPS is completely transparent and just like mutual funds, you can track how your money is performing. You also have a choice to pick a private or public fund manager to channelize your investment. The choice is especially important because this portion is market-linked and makes all the difference in how much you can end up making as returns.

The major concern here is that equity funds you invest in are usually passively managed by your fund manager. The year 2015 onwards, fund managers were allowed to actively take a call on the scrips, mainly to allow the investor to make higher returns. They were also allowed to invest mutual funds to bring flexibility without a cap.

Since the fee charged by the FM was just 0.01 percent of the investment, it wasn't feasible for them to carry on active management, hence some small fund managers chose to invest all of it (or most of it) in mutual funds.

How the change will affect you?

Experts say that the reintroduction of long-term capital gain tax and the recategorization of the MF categories have led to poor performance of the funds. If your fund manager has left you exposed to MF to a larger extent, it would have deteriorated returns for the year. But since NPS is a long-term investment, you are not exposed to great risk.
On the other hand, the new move by the PFRDA will also force fund managers to develop their skill set for direct investment seeking higher returns for customers, which means they could perform better in the future.

What should you do?

Track your NPS performance regularly and compare them with those of other fund managers. NPS allows you to switch the fund manager online twice a year with no added cost. If you are a new investor or you are looking at changing your fund manager, you can check the track record of how the different players in the market have been performing through direct investment and make an informed decision.