It happened as prospects of gains in fixed-income and elevated equity valuations drove investments towards gilts, said experts.
“When you’re talking of the NPS, it’s essentially a case where the investor decides where the money should go. At a time when equity markets are doing very well, the fact that people are going more for debt, especially government bonds, means they’re looking at it from the point of view of security,” said Madan Sabnavis, chief economist, Bank of Baroda. “Moreover, if I look forward, the distribution of money or the returns are related to both yields as well as capital gains. At this stage, there’s reason to believe that bond prices may go up as yields come down.”
Pension fund managers said the ownership of government bonds can be broadly taken as a proxy for NPS investments in debt. The figures at the end of December 2023 are equivalent to about 40% of the ₹11.73 lakh crore worth of overall assets under management (AUM) of the NPS for 2023-24, showed data on the NPS Trust.
“Composite schemes of the National Pension System (NPS) constitute 85% of the overall AUM under NPS. Under the composite schemes, maximum of 65% of the investment can be invested into govt securities and related investments and up to 45% can be invested into debt instruments and related investments and a maximum of 15% goes into equity,” said Kurian Jose, chief executive officer, Tata Pension Fund.
“In the fixed-income investment more money would be invested into g-secs (government securities), I would assume because we are looking at a falling interest rate scenario. When yields go down, you make much more money on g-secs because you may not have corporate bonds that are very long-dated with acceptable risk to return parameters,” he said.
Yields on government bonds have dropped sharply over the past couple of years, with that on the 10-year benchmark paper currently at 7.16% versus 7.62% in June 2022. Bond prices rise when yields fall, implying price gains for investors.
Given India’s inclusion in global bond indices from this year, yields may soften further in coming months, treasury executives said.
Meanwhile, benchmark equity indices have charted new highs over the past few months, with forward price-to-earnings ratio remaining elevated.
One of the major reasons behind the NPS investments in sovereign debt is the retirement plans of government employees, which are crafted in a way that compulsorily has a large share of debt.