NPS investing: should you change fund manager?
New Delhi: Mutual fund investors often compare the performance of their funds with similar programs from other fund houses. However, in the case of NPS, most investors do not. Previously, NPS plans generated similar returns due to indexation rules. However, after the phasing out of indexation rules, fund managers began to generate varying returns. Therefore, a periodic review of the performance of the NPS fund is required.
Currently, there is sufficient historical data available to analyze and compare the performance of your NPS funds with the performance of other fund managers. Based on this comparison, it’s easy to know if you need to change your NPS fund manager.
How often should you review the performance of your NPS funds
Experts say that a small underperformance of your NPS fund each year can lead to huge underperformance in the long run. âDue to the impact of long-term composition, the final corpus can vary considerably with these differences in performance. So review all long term investments annually and also review NPS portfolios like you do with mutual funds, â AND Wealth quoted Rajan Krishnan, founding director of Retyrsmart.com. Just like other investment options, these reviews can also be based on specific events. While it is not necessary to react to all current events, you should check if there is a fundamental change – like change in fund management, change in fund management style, etc. incidents are very rare in the NPS.
How to revise
Since the NPS is also focused on net asset value and tied to market forces, its review process may be similar to that of mutual funds. First, see if your fund manager is underperforming others. This comparison should not be based on short term returns of 1 to 3 months, but over a reasonably long period such as 1 to 3 years. The purpose of this exercise is to decide whether you should review your NPS manager or not. Please note that what we are suggesting is only a review and not a change due to a year of underperformance.
Once you realize that your fund manager is underperforming, the next step is to explain the reasons. âCheck out why the program is underperforming. You can continue with the program if the underperformance is due to a specific strategy and you are convinced of that strategy, âsaid the publication quoting Amol Joshi, founder of PlanRupee Investment Services. If you believe that you do not have the expertise to undertake such an analysis, you should seek the assistance of an investment advisor.
You cannot choose different managers for different asset classes
Switching from one fund manager to another in the NPS does not have a tax impact, which is the main advantage of the NPS. In the NPS, the change of fund manager will be tax neutral due to its open architecture.
However, NPS imposes a restriction here: you cannot have different fund managers for different asset classes. For example, if you choose HDFC AMC as your fund manager, you should choose the same fund manager for all of your funds (stocks, government debt, and corporate debt). Based on historical performance, the HDFC Pension Fund is the best performing in the equity and corporate debt category. However, LIC Pension Fund is the best performing in the government bond category. Since you do not have the option of investing in HDFC Pension Fund stock plan and LIC Pension Fund government bond plan, you need to take a call based on aggregate returns.
Also review asset allocation
Just like the annual review of fund managers, the review of asset allocation is also necessary on a regular basis. How often should we do it? âAs business cycles become shorter and lead to significant changes in the returns of asset classes, a quarterly change in asset allocation is necessary,â says Krishnan. However, the NPS has restrictions here and you are only allowed to switch between plans twice a year. Since asset allocation is essential in the build-up phase, make the changes between plans twice a year, experts say.