Equity funds of the NPS have not done too well till now. They have lost money in the past one year and delivered lower returns than corporate debt and gilt funds in the past five years. This has dragged down the returns of aggressive investors who allocated 50% to equity funds. But this should not make investors, especially younger people, ban this critical asset class from their portfolios.
Till last year, equity funds were mirroring the returns of the index because pension funds were supposed to invest in index stocks in the same proportion as their weight in the index. But from September 2015, fund managers have been allowed to invest in a larger universe of stocks and follow an active investment strategy that does not mirror the index. They still have to follow broad guidelines set by the PFRDA but can drop index stocks that are underperformers or pick up non-index scrips that have potential. HDFC Pension Fund, which has seen a smart increase in its AUM, already has more than 10% of its corpus invested in non-Nifty scrips. These include quality mid-cap stocks such as Shriram Transport Finance, LIC Housing Finance, Oracle and Rural Electrification Corporation.
Experts see this as a positive development because a predominantly large-cap orientation would have prevented the NPS equity funds from beating the market.More importantly, poor quality index stocks can now be dropped. "Till now there was a marginal difference in the returns of equity funds due to the passive investing. Now that fund managers can invest actively, some funds will break out of the clutter
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