Dealing With NPS In 2026 - III : Equity, NPS And The Investor

So far in this series on the NPS we have understood the taxability and exit rules as applicable in 2026. We have also understood the Multiple Scheme Framework (MSF). One of the major selling points of the MSF is the option to allocate upto 100% to equity. This may sound like an exciting proposition from the standpoint of expected returns. But holding any degree of equity within the NPS is fraught with risk. And in today's post I will explain why.

The Illusion Of Passivity

Expense ratios of common NPS equity schemes are mostly capped at 0.09% per annum. This is true for both Tier 1 and Tier 2 accounts. In case of equity schemes under the Multiple Scheme Framework, the figure rises to around 0.3% per annum. These figures are comparable to passive funds tracking major indices like Nifty 50 and Nifty Next 50. This leads to the belief that equity schemes within the NPS are passively managed.

But the reality is that equity schemes within the NPS are actively managed. This is true for both common and MSF schemes. The predominant universe for stock selection in case of most NPS equity funds would be the Nifty 200. So what investors in NPS equity schemes essentially get is active management at a low cost. Such an arrangement may sound attractive. But it actually works against the interests of investors.

Active management is fundamentally designed to incentivise fund managers. Managers of active funds are usually compensated handsomely for their skill and acumen. This is a major reason why active funds carry high expense ratios. The predominant part of the expense ratios we pay goes towards the salaries of our fund managers.

But the remuneration of NPS Pension Fund Managers is fixed by the Pension Fund Regulatory and Development Authority (PFRDA). PFRDA sets a slab based Fund Management Charge (FMC) structure based on Assets Under Management (AUM). The various slabs and applicable annual fund management charges are laid out in the graphic that follows.

Notice that the fund management charges reduce as the AUM increases. This clearly means that there is no incentive on offer for a pension fund manager to deliver outperformance. Giving our money to external parties who have no reason to gain from manage it well represents a raw deal for us. There is hence no logical reason to consider equity schemes within the NPS. The data and numbers are also in favour staying away from them.

Overview And Performance Analysis Of NPS Equity Schemes

Originally there were 11 major NPS Pension Fund Managers in India. They are listed out in the graphic that follows.

In June 2025, Max Life stopped operating as a pension fund manager. So there are currently 10 active pension fund managers in India. Let us now look at how these fund managers have performed. The metric we would be using to judge performance is that of rolling returns. Rolling returns refer to all instances of trailing returns between two dates. They offer a better picture of performance since they capture numerous data points.

5 year rolling returns will be used for this analysis. 5 year rolling returns capture all instances of trailing returns over a 5 year period. Of the 10 active pension fund managers, there is no rolling return data available for Axis, DSP and Tata. Therefore we will use the data of the remaining 7 for comparison. The 5 year rolling returns of these 7 schemes for the period ending December 2025 are laid out in the graphic below.

HDFC has the highest rolling return at 15.85%. Next come ICICI and UTI with 15.45% and 15.43% respectively. SBI has the lowest returns with 14.45%. On the surface, these results seem quite impressive. But they are yet to be evaluated against returns of a benchmark. A few months ago the benchmark for NPS equity schemes was changed to the Nifty LargeMidCap 250 index.

But for the majority of the preceding 5 year period the benchmark was the Nifty 200 index. It will therefore be considered as the benchmark for this analysis. The 5 year rolling return of the Nifty 200 TRI (Total Returns Index) for the period ending December 2025 is 16.13%. None of the funds under study even match this level. The average return for NPS Equity schemes as a whole is 15.29%. This is laid out in the graphic that follows.

The quantum of underperformance as a group is close to 1%. This is quite significant in and of itself. But the picture becomes even worse when rolling return outperformance consistency is considered. Rolling return outperformance consistency helps decipher how frequently a fund has beaten its benchmark. It therefore shows how reliable any outperformance is as opposed to merely measuring outperformance.

In light of the fees we pay to hold active funds, we should ideally expect an outperformance consistency of 70%. The bare minimum outperformance consistency our funds must deliver is 60%. Funds with an outperformance consistency of less than 60% should not find a place in our portfolios. In light of these facts, look at the performance data laid out below. It captures the number of NPS equity schemes outperforming the Nifty 50 TRI and the Nifty 200 TRI at different threshold levels of 5 year rolling return outperformance consistency.

The results speak for themselves. They are clearly quite damning. The picture does look a little better at 50% consistency and below. But outperformance consistency of 50% implies that chances of enjoying sustained outperformance are as good as a coin toss. And obviously, at 40% consistency those chances become even worse. This makes it clear that alpha generation from NPS equity funds is limited (if any) and unsustainable. So there is clearly little to be gained from holding NPS equity schemes.

Is It Fair To Judge Performance Over 5 Years? Why Not 10?

Theoretical finance and academic research shows that equity performs best over 10 to 15 years or more. Therefore an apparent case can be made for judging the performance of NPS equity schemes over at least 10 years instead of 5. But none of us invest in the capacity of theorists or academicians. We are retail investors looking for the best bang for our buck. NPS equity schemes come with hefty costs. So it is perfectly fair to expect our funds to deliver over 5 years. It is in fact the very least we should expect in light of the costs we bear. Waiting for 10 years or more may deal irreversible damage to our portfolios.

Final Takeaways

The performance of NPS equity schemes has been proven to be unsatisfactory. And this is a very kind way to put things. So there is nothing for investors to gain from NPS equity schemes. There is no need for most investors to consider the NPS in the first place. Those who would like to consider the NPS may hold a mix of corporate and government bonds. Equity exposure must remain outside the NPS. The fact that NPS equity schemes offer low costs also does not matter. Those looking for a low cost option to invest in equity may pick index funds. All in all equity exposure through the NPS must be avoided at all costs.