The corporate debt fund category of the National Pension System (called Asset Class C) has delivered returns of 11-13 per cent. The average return on corporate bond mutual funds (the most comparable mutual fund category) on the other hand, is 8.20  per cent. Mutual Fund schemes were hit hard by exposure to defaults and downgrades in groups such as IL&FS, Essel, DHFL, Reliance ADAG, Sintex BAPL and Altico. NPS Pension Funds were also exposed to some of these groups, but this was contained at low levels relative to the size of the pension funds. Over the past 3 years and 5 years, NPS Asset Class C has delivered returns in the range of 9-9.7 per cent, higher than the 7.5 per cent given by corporate bond funds.
NPS Tier I is a long term product (with a lock-in till the age of 60) and hence it is not directly comparable with debt mutual funds can be used for short term goals also. However, NPS Tier 2 can be used for short term goals and has no lock-in. Unfortunately, there is no clarity on the gains in NPS Tier 2 while debt mutual funds enjoy the benefits of a 20 per cent long term capital gains tax and indexation if held for more than 3 years. Investors should watch this space carefully. Any clarity on taxation will provide them with an efficient alternative in the fixed income space.
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