The National Pension System (NPS) is a voluntary contributory pension system that aims to provide pension income in retirement through market-linked returns. Any citizen of India between the age of 18 and 65 years is eligible to open an NPS account. Non-resident Indians (NRIs) can also open an NPS account.

The pension scheme now manages over Rs 7.73 lakh crore as retirement assets of the government and private sector employees.  

According to tax and investment experts, one must carefully choose a fund manager while investing in NPS. 

Explains Amar Ranu, head – investment products and advisory, Anand Rathi Shares and Stock Brokers: “Though NPS is a low-cost pension product, choosing the right fund manager is the most important task. However, unlike mutual funds (MFs), the information related to NPS is available in a very limited capacity in the public domain, and nor does any vendor holistically collect the data. The portfolio is not available for all NPS managers.”

Earlier, there were seven NPS managers; however, recently four more have been added, which takes the total number of fund managers to 11. So, the task becomes even more daunting for retail investors to select the right fund manager. The four asset managers that have recently been given certification for managing NPS assets are: Axis Asset Management, DSP Investment Managers, Tata Pension Funds, and Max Life Pensions.

Adds Ranu: “Seeing the historical performance, more or less, all fund managers have identical performance differing by a few basis points up or down, except for LIC Pension Fund, which is underperforming by a large margin. However, among the pack, HDFC Pension Fund is the best performer based on three-year and five-year performance history. All pension managers have not bitten the index bellwether, Nifty 50 TRI.” 

Additionally, these fund managers were mostly managing their portfolios passively, largely replicating the indices and sticking to large caps, thus, playing it safe. However, now they have started adding mid-caps and are managing it actively, which may result in additional alpha over the benchmarks like we have seen in case of mutual funds. However, according to experts, one should not just look at the return while selecting the fund manager. The risk taken to deliver the return should also be seen – standard deviation is the right tool.

So, here are the ways in which you can choose the right fund manager for your NPS investment. 

1] First, decide between the auto and active modes of fund management. If you have chosen more than 50 per cent equity exposure, then it is advisable you choose the active mode instead of the auto mode. 

2] Next, choose the fund manager. You can look at the fund performance till date to understand how the funds managed by a particular fund manager has performed over time. If your debt exposure is high, check the performance of the debt funds managed by the fund manager. Similarly, if your equity exposure is higher, check the performance of the equity funds managed by the fund manager.

Says Adhil Shetty, CEO and founder, BankBazaar.com, a financial services website: “Continue to review the performance of your selected fund manager after you have started the investment. If you are not satisfied that the return it has given is at par with other similar funds, then you have the option to change your fund manager once a year.” 

3] The rolling returns will only give you an idea of how the fund has performed. You need to review it from time to time to ensure that the performance is at par with other funds within the same category. 

Adds Ranu: “Consistency in rolling returns over three-year and five-year periods is the best tool to decide along with the risk taken. However, one should avoid changing the fund manager over short-term performance. Rather, one should see the fund performance over the longer horizon.”

4] Assess the performance of your fund manager. If you are not happy with the return it has given, change your fund manager. NPS subscribers are allowed to change their fund manager once a year. 

5] Lastly, as Ranu suggests, the best would be to see the portfolio and positioning before selecting the fund manager. However, the availability of portfolio data is limited. 

“With the increase in the number of fund managers, the competition is going to be tough among the fund managers to deliver the best, which is good for all stakeholders, including investors,” adds Ranu.