They reached late, but NPS (National Pension System) investors have finally joined the party in the capital markets. NPS schemes have generated better returns than the provident fund. The average NPS fund for Central government workers has given 10.35% returns since launch, while the average state government scheme has delivered 10.84%.

The NPS schemes for the general public have also done very well, thanks to the bullishness in the equity markets and the recent rally in bonds. The average equity fund has generated 14.6%, while the corporate bond fund has given 10.6%. Gilt funds have given average returns of 9.9%. These calculations are based on SIP returns on monthly contributions from inception till December 2014.

The high returns should be music to the ears of the estimated 36 lakh government employees (14 lakh Central government and 22 lakh state government) who have nearly . 53,500 crore invested in the NPS.` Three pension funds manage this gigantic corpus, which is almost 92% of the total assets under management (AUM) of the NPS.

But the higher returns have been accompanied by greater volatility. The NPS funds did well in 2012-13, but gave pathetic returns in the following year. As bond yields shot up in 2013-14, the SIP returns of the average Central government fund was 5.4% while the average state government fund grew only 4.9%.The 18% returns from equities that year didn't help much as these funds had only a small portion of their corpus in stocks. The Pension Fund Regulatory and Development Authority allows NPS managers to invest up to 15% in equities, but no pension fund manager has ever hit that ceiling.

As on November 30, 2014, the Central government scheme of UTI Retirement Solutions had only 11.48% in stocks, while the fund managed by SBI Pension Fund had allocated only 8.25% to equities. The unsaid benchmark use for the Central government NPS is the EPFO rate of return. Therefore, pension fund managers keep a lower allocation to stocks. But this compromises the long-term return potential of the scheme. They should ideally increase the exposure to equity. Despite the conservative allocation, NPS funds have given very good returns in the first nine months of 2014-15. This is largely due to the bond rally in 2014. The 10-year benchmark bond yield fell 135 basis points -from 9.1% in April 2014 to around 7.8% by the end of 2014 -pumping adrenaline into the NAVs of funds overweight on government bonds.

The average SIP return of the gilt funds in 2014-15 is close to 22%, better than the 20% delivered by the equity funds during the same period. In the NPS segment for the private sector, the E class (equity) funds have done very well with average SIP returns of 14.6% since the scheme was thrown open to the public in May 2009. But the cap of 50% on equity exposure means even the most aggressive investor (with the maximum 50% stocks) has managed to earn only 12.5% returns. ET looked at the returns of four different types of investors in the past three financial years and since launch

Interestingly, ICICI Prudential Pension Fund has been the best performing pension fund for all four investor types. Kotak Pension Fund and SBI Pension Fund are tied for the second position.

UTI Retirement Solutions is the worst performer, figuring last for all types of investors. NPS investors can change their pension fund manager once in a year.