The National Pension System (NPS) is a market-linked retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
Subscribers make regular contributions to build a retirement corpus, with the returns linked to the performance of the underlying investments.
NPS fund managers play an important role in managing these investments and allocating funds across asset classes such as Equity (Scheme E), Corporate Bonds (Scheme C), Government Securities (Scheme G) and Alternative Assets (Scheme A).
Based on the performance of underlying securities, the returns generated by your chosen fund manager may vary, and that’s the situation when you may think about changing the NPS fund manager, especially when another pension fund manager (PFM) reports better returns.
A PFM that has delivered relatively stable performance over several years does not guarantee similar returns in the future. Similarly, a fund manager’s short-term underperformance does not necessarily indicate that it will continue to lag over the long term.
So, when does changing an NPS fund manager make sense, and when is it better for investors to stay put?
What is an NPS fund manager, and how does it work?
An NPS pension fund manager (PFM) is a PFRDA-licensed entity entrusted with investing subscribers’ NPS contributions. Based on the investment fund or investment option selected by the subscriber, the PFM invests the money across permitted asset classes such as equity, corporate debt and government securities.
Within each asset class, the pension fund manager is responsible for security selection, portfolio construction, risk management, liquidity management and compliance with the investment guidelines prescribed under the NPS framework.
NPS investments are governed by PFRDA’s investment guidelines, including asset-class limits, issuer exposure norms and credit safeguards. This makes the subscriber’s asset allocation decision and the fund manager’s execution within that allocation two distinct but equally important parts of the investment outcome.
List of NPS fund managers
According to PFRDA, there are ten registered Pension Fund Managers (PFMs) in India that oversee NPS funds.
A. Pension Funds (PFs) for ‘Default Scheme’ under Government Sector:
- LIC Pension Fund Limited
- SBI Pension Funds Pvt. Limited
- UTI Pension Fund Limited
B. Pension Funds (PFs) for Government (other than ‘Default Scheme’) and Private Sector:
- LIC Pension Fund Limited
- SBI Pension Funds Pvt. Limited
- UTI Pension Fund Limited
- HDFC Pension Fund Management Limited
- ICICI Pension Fund Management Limited
- Kotak Mahindra Pension Fund Limited
- Aditya Birla Sun Life Pension Fund Management Limited
- TATA Pension Fund Management Private Limited
- Axis Pension Fund Management Limited
- DSP Pension Fund Managers Private Limited
When should an investor switch the NPS fund manager, and when should the investor stay put?
An investor may consider switching if the NPS fund manager has consistently underperformed its benchmark and comparable funds over a long period.
Investors should focus on long-term fund consistency, performance in different market conditions and risk management philosophy.
“In a retirement product such as NPS, staying with a reasonably consistent fund manager can often be more sensible than repeatedly chasing the latest winner,” said Kurian Jose, CEO, Tata Pension Management.
“Investors should look at how the fund has been able to outperform both the benchmark and peers on a risk-adjusted returns basis. The subscriber would reasonably expect that the fund to outperform the benchmark over the longer term,” added Jose.
The benchmark returns help show whether the fund manager has performed well within the relevant market. Peer comparison shows how the fund manager has performed against others, and those rankings can change frequently.
Currently, the pension fund manager can be changed once in a financial year, while investment choice can be changed four times in a financial year.
“The main risk is that investors may keep moving to whichever fund manager has recently delivered the highest return. Market conditions change, and the fund manager that performed best last year may not remain at the top the following year,” according to Jose.
NPS is designed for long-term retirement savings. Investors should therefore review their fund manager periodically, but change only when there is a clear reason, such as continued underperformance over a longer period.
If two pension fund managers have similar long-term returns, what else should determine the choice?
According to Jose, where long-term returns are comparable, investors should consider:
- Consistency: Has the fund manager delivered reasonably steady performance, or did one particularly good year lift its overall return?
- Performance during difficult markets: How did the fund perform when markets were weak or uncertain?
- Risk management: Has the fund manager taken sensible and controlled risks while managing subscribers’ retirement savings?
- Quality of the portfolio: Is the money spread across suitable investments, or is it concentrated in a few companies or sectors?
- Experience in asset management: Investors may also consider the experience and track record of the institution behind the pension fund manager. A well-established financial-services brand may bring strong research capabilities, investment processes, governance and risk-management practices.
Nearing retirement? Should you switch NPS fund managers?
As retirement gets closer, protecting the accumulated corpus becomes increasingly important.
“An investor nearing retirement should first review the overall mix of equity, corporate bonds and government securities in the NPS account. Reducing unnecessary risk through appropriate asset allocation may be more important than changing the fund manager,” recommended Jose.
Switching fund managers should be considered if a fund manager has consistently underperformed over a long period; a change may still be considered.
Are NPS subscribers too focused on chasing the highest-performing fund manager?
Informed investors are naturally attracted to the fund manager showing the highest recent return. However, for a retirement investment such as NPS, it is more important to look at:
- Performance over a longer period
- Consistency across different market conditions
- Comparison with the relevant benchmark
- How well risk has been managed
NPS subscribers should review their fund manager periodically, but they should avoid making decisions based only on recent returns. Long-term consistency, performance against the benchmark, sensible risk management and the subscriber’s retirement horizon are more important than short-term rankings.
Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.
