The National Pension System (NPS) has dedicated fund managers, called pension fund managers (PFMs), to manage the money you invest in it. But did you know, when you choose to let your NPS money be invested in equity, they are allowed to invest it in mutual funds? For you, as an NPS subscriber, this means added costs because you pay an investment fee to the pension fund managers apart from bearing the underlying expenses of mutual funds. Among the eight pension fund managers that NPS currently has, one pension fund manager—Kotak Pension Fund Ltd—has taken the mutual fund route for its equity investments. How does it impact you and what is the regulatory view on this? We explain.

Is NPS allowed in mutual funds?
Initially, equity investment from NPS could only be done passively, through index funds that replicate Sensex or Nifty 50. In 2013, the Pension Fund Regulatory and Development Authority (PFRDA) allowed pension fund managers to invest in stocks directly but the decision was reversed in 2014. In 2015, the G.N. Bajpai committee—set up to review investment guidelines for the private sector NPS—recommended moving from passive to active management. PFRDA then allowed the pension fund managers to invest directly in stocks and equity mutual funds. They can also invest in specified exchange-traded funds (ETFs). “The investment guidelines allow pension fund managers to invest in equity mutual funds, but the idea was to just offer flexibility and choice,” explained Hemant G. Contractor, chairman, PFRDA.

Are mutual funds better?
For Kotak Pension Fund, mutual funds are not one of the investment strategies. They are the strategy. The pension fund manager says this offers better returns than direct equity investments: “At an equity portfolio size of Rs150 crore, it doesn’t make sense to incur huge infrastructural costs to actively manage the portfolio. We invest in mutual funds instead,” said Sandeep Shrikhande, chief executive officer, Kotak Pension Fund. “Since we invest in direct schemes, the total expense ratio is an average of 1.25%. Despite the costs, if we can beat the returns offered by direct equity investments (from other pension fund managers) then we see this as a good strategy and are unlikely to change going forward, unless we assume enough size,” he added.

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