Introduced in 2016, Scheme A is available only to Tier-1 NPS investors. The idea was to expand the investment universe for subscribers. But are the risks worth it?
Although the National Pension Scheme (NPS) is a retirement planning vehicle, it does allow you to take higher risks, if you’re up for it. We have a scheme A that stands for alternative investments. This plan invests in Alternative Investment Funds (AIF Category I and II), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), Basel III Tier 1 bonds and securitised papers. All the seven pension fund managers offer this option. But before you decide to go chasing higher returns, it’s important to understand what this scheme offers, and the risks involved.
A high-risk, high-return game
Introduced in 2016, Scheme A is available only to Tier-1 NPS investors. It is not available under the Tier-2 account. To make sure your risks are limited, you can only invest up to 5 percent in this scheme under the active choice. The ‘auto’ option does not offer Scheme A.
“The idea behind launching Scheme A was to expand the investment universe for subscribers. It is for the investors who are ready to take extra bit of risk,” says Supratim Bandyopadhyay, Chairman, PFRDA, the regulatory body for NPS.
Despite being in existence for more than four years, the combined assets under management (AUM) of Scheme A is only Rs 81 crore (as on May 2021), just 0.2 percent of the overall AUM of Rs 49,187 crore.
“One of the reasons is the cap on investments in the scheme up to a maximum of 5 percent of the total portfolio,” says Bandyopadhyay. Also, many investors may not understand these new-generation investment instruments such as AIFs, REITs, InvITs and Basel III Tier 1 bonds, he adds.
High on AT1 perpetual bonds, low on REITs and InvITs
Most NPS managers have made significant investments in Additional Tier (AT1) perpetual bonds. AT1 bonds can give higher yield than other bonds, but they come with risk on account of their complex structure. Many experts believe that they are quasi-equity instruments that masquerade as debt investments. Yes Bank’s AT1 bonds debacle last year brought to light the real risks with such investments.
“We have restrictions on perpetual bonds – the percentage of the corpus they (NPS managers) can invest in AT1 bonds and what kind of bonds they can choose,” says Bandyopadhyay.
The A schemes of all NPS managers hold AT1 bonds of banks, such as those of SBI, ICICI bank, HDFC bank, Axis bank and IndusInd bank – usually the stronger ones.
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