Why National Pension System funds invest in large-cap stocks, not in small and midcaps

National Pension System (NPS) is one of the easily accessible, low cost and tax-efficient retirement savings account. The contribution made to your account is invested by the fund managers. Hence, the overall accumulated pension wealth heavily depends on the income generated from the investment of such wealth.  The funds contributed by the NPS subscribers are invested by Pension Fund Managers registered with the PFRDA. They are regulated by the PFRDA guidelines. Currently, there are eight pension fund managers: ICICI Prudential Pension  Fund, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Fund, UTI Retirement Solutions Pension Fund LIC Pension Fund, HDFC Pension Management Company, DSP Blackrock Pension Fund Managers. The list of fund managers mage over a period of time as the registration of managers is an ongoing process. 

In order to ensure the NPS funds are not exposed much to market risks, PFRDA frames investment guidelines suggesting  a judicious mix of instruments. PFRDA says in an official document, "The investment guidelines are framed in such a manner that there is minimal impact on the subscribers contributions even if there is a market downturn by a judicious mix of investment instruments like Government securities, corporate bonds and equities."

In an interview to The Economic Times published today, PFRDA chairman Hemant Contractor also dwelled on the issue. He made it clear why NPS funds are invested more in large-cap stocks and not in small- and midcap stocks. Contractor said large-cap stocks are "bigger and well-traded stocks"/ Therefore they are "safer" as compared to the small- and mid-cap stocks. He said that NPS fund managers look for "stable growth" not massive returns. 

The PFRDA chairman also said that the NPS doesn't have a liquid fund because, in the long run, they cannot generate high returns. 

NPS fund management schemes

The NPS funds are invested in two ways: 

1. Active choice: Under this scheme, the individual subscribers get the opportunity to decide the kind of investment instruments in which the fund has to be invested. They also get to percentages of the fund to be invested in different instruments. 

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2. Auto choice - Lifecycle Fund: PFRDA says this is the default mode under the NPS. The fund is managed automatically on the basis of the age profile of the subscriber.