A Comparative Study of Pension Fund Managers operating Scheme - C (Tier-II) of National Pension System

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1 Available online at : pp. 198~212 Thomson Reuters Researcher ID: L A Comparative Study of Pension Fund Managers operating Scheme - C (Tier-II) of National Pension System Harish Chander, P.G. Student, Department of Commerce, AIJHM College, Rohtak, India Abstract National Pension System was introduced by the Government of India to provide the sustainable old age pension to organized and unorganized sector workers. It is a defined contributory pension system in which both employees and employer contribute the amount to provide old age pension to employees. There are various models of NPS for example, Central Government Model, State Government Model, All Citizen Model, Corporate Model, NPS-Swavalamban (NPS-Lite) and Atal Pension Yojna. Each model targets a separate group of workers. All Citizen Model of NPS mainly targets the unorganized sector workers including self-employed. Each subscriber having Tier-I account can open Tier-II account as well under NPS. The Corporate Debt Scheme is one of the assets class under All Citizen Model in which a subscriber can invest his contribution upto 100 percent. The present study is undertaken to evaluate the performance of seven Pension Fund Managers operating Corporate Debt (Tier-II) Scheme of NPS. Various statistical and risk-return measures like Standard Deviation, Coefficient of Variation, Beta Coefficient, Jensen s Alpha, Treynor s Index, Sharpe Ratio and Two-way ANOVA etc. were used in the present study. It was found that LIC and HDFC are not able to beat the benchmark return in since inception category and LIC has the larger unique risk as compared to others. The performance of ICICI is superior to others. The performance of SBI, Kotak, Reliance and UTI RSL is also good. The difference between the returns of various Ms was statistically insignificant when actual date of inception was taken for analysis whereas it was statistically significant when the common date of inception was taken for analysis. Key Words: NPS, Pension Fund Managers, Corporate Debt, Sharpe Ratio, Treynor s Index 1. Introduction The Scheme-C denotes the Corporate Debt Scheme of National Pension System. The scheme is one of the six schemes operated under All Citizen Model of National Pension System (NPS). An investor who opens his account under the All Citizen Model is required to opt his own investment mix and his own Pension Fund Manager (M) out of Seven Ms. The funds received from investors are invested into Assets Backed Securities (A-Class), Equity (E-Class), Corporate Debt (C-Class) and Government Securities (G-Class) in the ratio decided by the individual investor. The investor can select Auto Choice or Active Choice for investment of his corpus. If an investor selects the Auto Choice, then his funds will be invested into different types of assets according to the age of the investor which is known as Life Cycle Fund. Three modes of investment are available under Auto Choice namely LC-25, LC-50 and LC-75 which are known as conservative, moderate and aggressive life cycle funds. An investor can select one alternative out of these three alternatives but he can change his option once in a year. If an investor does not select any investment option then his funds will be invested as per investment mix mentioned in LC-50 which 198

2 is a default option. The maximum exposure into equity is restricted upto 25 percent in LC-25, 50 percent in LC-50 and 75 percent in LC-75. In life cycle based investment mix, the investment in Equity and Corporate Debt reduces with the advancement in age and investment in Government Securities is increased simultaneously. However, an investor can select his own investment mix under Active Choice mode but his exposure in equity will be restricted upto a maximum of 50 percent. The investment in Corporate Debt and Government Securities is free from any type of upper ceiling under Active Choice mode. 1.1 Eligibility Conditions A citizen of India between years of age including NRI subject to certain conditions can open his account under All Citizen Model of NPS. The investor can open his account with any of the Point of Presence-Service Provider (POP-SP) after complying with the Know Your Customer (KYC) norms. 1.2 Benefits of NPS: 1. Low Cost: NPS is considered to be the world s lowest cost pension scheme. Administrative charges and fund management fee are also the lowest. 2. Simple: All applicants has to do is to open an account with any one of the POPs and get a PRAN. After getting PRAN, they can invest in NPS. The funds are managed by professional fund managers at a very low management charges. 3. Flexible: Under this scheme the applicants can choose his/her own investment option and M or select Auto Option to get better returns. 4. Portability of PRAN: Applicants can operate his PRAN from anywhere in the country and can pay contributions through any of the POP-SPs irrespective of the POP-SP branch with whom the applicant is registered, even if he/she changes his/her city, job etc. 5. Prudentially Regulated: The NPS is regulated by Pension Fund Regulatory and Development Authority (RDA) and strict compliance is adhered upon the Ms to follow the investment guidelines issued by RDA from time to time. 6. Tax Benefits to Employees: Individuals who are employed and contributing to NPS would enjoy tax benefits on their own contributions as well as their employer s contribution as mentioned below: (a) Employee s own contribution The investors are eligible for tax deduction up to 10 percent of Salary (Basic + DA) u/s 80 CCD (1) within the overall ceiling of Rs. 1.5 lacs u/s 199

3 80 CCE. An additional deduction u/s 80 CCD (IB) upto Rs. 50,000 is also available for additional contribution into NPS. (b) Employer s contribution The employee is eligible for tax deduction up to 10 percent of Salary (Basic + DA) contributed by employer u/s 80 CCD (2) over and above the limit of Rs. 1.5 lacs provided u/s 80 CCE. (c) Tax benefit for self-employed: The investors are eligible for tax deduction up to 10 percent of gross income u/s 80 CCD (1) with in the overall ceiling of Rs. 1.5 lacs u/s 80 CCE. The additional deduction u/s 80 CCD (IB) is further available in this case also. However, tax benefits would be applicable as per the Income Tax Act, 1961 as amended from time to time. 1.3 Types of Accounts 1. Tier-I account: The applicant shall contribute his/her savings for retirement into this non-withdrawable account however partial withdrawal is allowed before attaining the age of 60 years but the partial withdrawal is subject to certain terms and conditions. This is the permanent retirement account and applicant can claim tax benefits against the contributions made into Tier-I account subject to the Income Tax Rules in force. 2. Tier-II account: This is a voluntary savings account. The applicant is free to withdraw his/her savings from this account whenever he/she wishes. This is not a retirement account and applicant cannot claim any tax benefits against contributions to this account. 1.4 Withdrawal and Exit A. Upon attainment of the age of 60 years: At least 40 percent of the accumulated pension wealth of the subscriber needs to be utilized for purchase of annuity from any of the RDA empanelled Insurance Company to provide monthly pension to the subscriber and the balance 60 percent amount is paid as lump sum payment to the subscriber. However, the subscriber has the option to defer the lump sum withdrawal till the age of 70 years. 200

4 B. At any time before attaining the age of 60 years: If a subscriber wants to exit the scheme before attaining the age of 60 years, than he/she has to purchase the annuity from at least 80 percent of the accumulated pension wealth and the balance is paid as a lump sum payment to the subscriber. C. Death of the subscriber: The entire accumulated pension wealth (100 percent) would be paid to the nominee/legal heir of the subscriber and there is no compulsion to purchase any annuity out of accumulated wealth. 2. Review of Literature Rao and Raivndran (2002) in their paper evaluated the 269 open-ended Indian mutual fund schemes for computing relative performance index. Various risk-return measures like Treynor s Ratio, Sharpe Ratio, Jensen s measure and Fama measure were used in the study. The funds having returns less than risk-free returns were excluded from the study and mainly 58 schemes were used for further analysis. It was revealed that mean monthly (logarithmic) returns and risk of the sample mutual fund schemes during the period of study were 0.59 percent and 7.10 percent respectively as compared to similar statistics of 0.14 percent and 8.57 percent for market portfolio. The results of performance measures suggested that most of the mutual fund schemes in the sample of 58 were able to satisfy investor s expectations by giving excess returns over expected returns based on both premium for systematic risk and total risk. Gohar, Ahmed and Niazi (2011) made an attempt to analyze and compare the performance of different types of mutual funds in Pakistan and concluded that equity funds had outperformed the income funds. These funds were further classified into broker-backed and institutional-backed funds for detailed analysis. Findings showed that within equity funds, broker-backed category shows better performance than institutional-backed funds. On the other hand, among income funds, institutional-backed funds have outperformed the broker-backed funds. Various measures like Sharpe Ratio, Treynor s Ratio, Jensen s Alpha, Information Ratio etc. were used in the study for making comparison. Prajapati and Patel (2012) have evaluated the Indian Mutual Funds through relative performance index and risk-return analysis e.g. Treynor s Ratio, Sharpe Ratio, Jensen s Alpha and Fama s measure. Daily closing NAVs were used in the analysis. The results suggested that most of the mutual funds have given positive returns during the period of study i.e to Jain (2012) in his paper studied the 45 equity schemes offered by 2 private sector companies and 2 public sector companies covering the period from April,1997 to April The analysis has been made using the risk-return relationship and Capital Asset Pricing Model (CAPM). The analysis revealed that HDFC and ICICI have been the best performers, UTI was an average performer and LIC was the worst performer which gave below expected returns on the riskreturn criteria. 201

5 Nimalathasan and Gandhi (2012) analyzed the financial performance of equity diversified schemes and equity mid-cap schemes of selected banks. Various statistical measures and ratios like Standard Deviation, Beta, Alpha, Sharpe Ratio, Treynor Ratio, Jensen Ratio and Information Ratio etc. were used by the researchers. Bahl and Rani (2012) in their paper investigated the performance of 29 open-ended, growth oriented equity schemes. Monthly NAVs of different schemes have been used to calculate the returns of the schemes. BSE-Sensex was used as the benchmark index. The historical performances of the schemes were evaluated on the basis of Sharpe Ratio, Treynor s Index and Jensen s Alpha. The study revealed that 14 out of 29 mutual fund schemes had outperformed the benchmark return. The results also showed that some of the schemes had underperformed the benchmark return due to diversification problem. Annapoorna and Gupta (2013) in their research paper evaluated the performance of mutual fund schemes ranked one by CRISIL and compared their returns with SBI domestic term deposit rates. Simple statistical techniques like averages and rate of return were used by the researchers. The results obtained from the study shows that in most of the cases the mutual fund schemes have failed even to provide the returns equal to SBI domestic term deposits. Narayansamy and Rathnamani (2013) attempted to analyze the financial performance of selected mutual fund schemes through the statistical parameters such as Alpha, Beta, Standard Deviation, R-squared and Sharpe Ratio. The study comprises of 5 mutual fund schemes launched by different private sector mutual fund houses. It was found that all the funds have performed well during the study period. The fall in the CNX NIFTY during the year 2011 has impacted the performance of all the selected funds. Finally, it was concluded that all the funds have performed well in the highly volatile market except Reliance Vision. Ashraf and Sharma (2014) have made an analysis of the performance of equity mutual funds against risk free rate and benchmark return over the five years time period. The sample consists 10 growth oriented open-ended equity mutual fund schemes belonging to 5 public and 2 private mutual fund companies. Coefficient of Variation, Treynor s Index, Sharpe Ratio, Jensen s Alpha, Fama s Measure and Regression Analysis were used for comparison of performance. The analysis revealed that out of 10 schemes, 3 have underperformed the market and 7 are found to have lower total risk than the market. Further all the schemes have given returns higher than risk free rates. The Treynor Ratio of all the mutual funds schemes has outperformed the benchmark market index and Sharpe Ratio of 3 mutual fund schemes underperformed the benchmark index. The result of regression analysis suggests that return on benchmark index has statistically significant impact on mutual fund return at 5 percent level of significance. Qamruzzaman (2014) attempted to evaluate the performance of 32 growth oriented mutual funds of Bangladesh on the basis of monthly returns in comparison to benchmark returns. For this purpose, risk adjusted performance measures e.g. Jenson s Alpha, Treynor s Index and Sharpe Ratio were used in the study. It was found that the growth oriented mutual funds have not performed better with respect to their volatility levels. 202

6 Hence, the researchers have mainly used various statistical and risk-return measures for evaluation of the mutual fund schemes. The NPS Scheme-C (Tier-II) was become operative in 2009 and sufficient time has been lapsed since inception of the scheme but no study has been carried out to measure its financial performance. To fill up some of the research gap, the present study is undertaken to review the performance of various Ms operating NPS Scheme-C (Tier-II). 3. Objective of the Study The main objective of the present study is to review the performance of the Pension Fund Managers operating NPS Scheme-C (Tier-II) i.e. Corporate Debt Scheme (Tier-II) since inception of the scheme. 4. Research Methodology Secondary data has been used in the present study which was collected from the websites of respective Ms and NPS Trust. The daily NAVs of seven Ms namely SBI, LIC, UTI RSL, ICICI, Reliance, Kotak and HDFC from the date of inception of the scheme by the respective M to 31 st December, 2016 have been taken for analysis. The earlier date of inception of the scheme is 14 th December, 2009 and the first common date when the scheme becomes operative by all the seven Ms was 12 th August, The daily log returns were used in the calculations of various risk-return measures. The rate of interest on P i.e. 8.1 percent was used as the risk free rate of return. S&P BSE Corporate Bond Index was taken as the benchmark index for analysis of the scheme as it matches the time horizon of investment of the scheme. All the NAVs collected were first checked for any abnormality, duplicity and mistakes which were corrected by using suitable methods. The returns was found stationary and the results of Augmented Dickey Fuller Test fails to accept the hypothesis that the returns generated by various Ms have the unit root. The corrected data was used to calculate various risk-return measures like CAGR, Standard Deviation, Coefficient of Variation, R-squared, Beta Coefficient, Jensen s Alpha, Treynor s Index and Sharpe Ratio. These statistical measures and ratios were used for inter-firm comparison in the present study. The Two-Way ANOVA method was used to test the following hypotheses: 1. H 0: There is no significant difference in the returns generated by various Ms. 2. H 0: There is no significant difference in the quarterly returns generated by a M. 5. Discussion Table and Figure 1 shows that SBI and ICICI are the majority assets holders of the segment. Together they hold percent assets under management of the segment. 203

7 International Journal of Research in Finance and Marketing (IJRFM) Table 1: Performance Analysis of Corporate Debt Scheme (Tier-II) of NPS Particulars SBI LIC UTI ICICI RSL REL. KOTAK HDFC Assets (Rs. In Cr.) Assets holding (in %) Scheme Inception Date Note. Adapted from NPS Scheme C, by NPS Trust, Retrieved from trust.org.in/images/c-2_dec16.pdf Figure 1: Assets Holding of All Ms under Corporate Debt (Tier-II) Scheme Assets Holding (in %) Assets Holding (in %) SBI LIC UTI RSL ICICI Reliance Kotak HDFC Source: Data of Table 1 Other Ms are holding assets ranging from 2.94 percent (LIC ) to 7.85 percent (HDFC ). Although HDFC has started the scheme with effect from 1st August, 2013 yet it has gained third position in terms of assets holding. 204

8 Table 2: Performance Analysis of Corporate Debt Scheme (Tier-II) of NPS Particulars SBI LIC UTI Last 6 Months Return Bench. Return for all Ms RSL ICICI REL. KOTAK HDFC Last 1 Year Return Bench. Return for all Ms 11.1 Last 2 Year Return Bench. Return for all Ms Last 3 Year Return Bench. Return for all Ms Since Return Inception Bench. Return for all Ms Note. Adapted from NPS Scheme C, by NPS Trust, Retrieved from trust.org.in/images/c-2_dec16.pdf Table 2 shows the returns generated by each M during various time intervals. The table shows that all the Ms were generated higher returns than their benchmark return in Last 6 months, Last 1 year and Last 2 year time period. Similarly all the Ms except HDFC have given more returns than their benchmark return in Last 3 years time period. Further LIC and HDFC were unable to beat the benchmark return in Since inception category. Other Ms were provided more return than their benchmark return in Since inception category. The highest return in Since inception category is generated by ICICI followed by SBI, UTI RSL, Kotak and Reliance. 205

9 Figure 2: Returns Generated by Ms in Since Inception Category Since Inception Return Benchmark Return 8.5 SBI LIC UTI RSL ICICI Reliance Kotak HDFC Source: Data of Table 2 Table 3: Performance Analysis of Corporate Debt Scheme (Tier-II) of NPS Particulars SBI LIC UTI ICICI REL. KOTAK HDFC RSL Coefficient Variance of R Beta Coefficient Jensen s Alpha Treynor s Index (TI-(R m-r f)) (1.96) (7.76) (1.29) (2.54) (0.76) (1.41) (10.22) Sharpe Ratio of Ms Returns Sharpe Ratio of Bench. Returns Source: Calculated using NAVs of all Ms from inception to 31 st December, 2016 Table 3 shows that the Coefficient of Variation of HDFC (9.67) is the lowest followed by LIC (10.71). The Coefficient of Variation of other Ms is almost double than that of HDFC and LIC which shows that the risk of HDFC and LIC is lower than their other counterparts. The value of R-square is almost one in all cases and in such situations the Beta Coefficient can provide 206

10 useful insight into the risk exposure of the Ms. The Beta of LIC (0.24) and HDFC (0.18) are considerably lower than Beta of other Ms which ranges from 0.70 to Figure 3: Beta Coefficient of all Ms operating Corporate Debt (Tier-II) Scheme Beta Coefficient SBI LIC UTI RSL ICICI Reliance Kotak HDFC Beta Coefficient Source: Data of Table 3 The value of Jensen s Alpha of ICICI (2.08) is the highest followed by LIC (1.86), HDFC (1.84), SBI (1.76), UTI RSL (1.03), Kotak (1.00) and Reliance (0.53). The values of Treynor s Index of HDFC (13.00) is the highest followed by LIC (10.79). The Treynor s Index of other Ms is considerable low than HDFC and LIC and ranged from 2.20 (Reliance ) to 3.98 (ICICI ). Table 3 and Figure 4 show that the Sharpe Ratio of LIC (0.17) and Reliance (0.45) are lower than the Sharpe Ratio of benchmark index. The Sharpe Ratio of other Ms is more than the Sharpe Ratio of benchmark index. LIC has the unique larger risk as the value of its Treynor s Index is comparatively higher whereas its Sharpe Ratio is lowest among all Ms. 207

11 Figure 4: Sharpe Ratio of Ms and Benchmark Index (Since Inception) Sharpe Ratio of Ms Sharpe Ratio of Benchmark 0 SBI LIC UTI RSL ICICI Reliance Pf Kotak HDFC Source: Data of Table 3 On the basis of above discussion it can be concluded that the performance of ICICI is superior than others and performance of LIC and HDFC is not satisfactory as they are unable to beat the benchmark return in Since inception category. The LIC has its unique larger risk and its Sharpe Ratio is also lower than Sharpe Ratio of benchmark index. The performance of SBI which is another majority assets holder is also satisfactory. The above discussion is based upon the data from actual date of inception of the scheme by the respective M to 31 st December, Hence, the results are needed for confirmation by taking a common date of inception which is 12 th August, 2013 when all the Ms have started the scheme. Table 4 shows that the performance of LIC and HDFC is not satisfactory as both are unable to beat the benchmark return. 208

12 Table 4: Performance Analysis of Corporate Debt Scheme (Tier-I) of NPS Since 12 th Aug., 2013 Particulars SBI LIC UTI RSL Return since Bench. Return Coefficient Variance of ICICI REL. KOTAK HDFC R Beta Coefficient Jensen s Alpha Treynor s Index (TI-(R m-r f)) Sharpe Ratio of Ms Returns Sharpe Ratio of Bench. Returns 4.19 (1.16) (7.76) 4.02 (0.99) 4.47 (1.44) 4.80 (1.77) 4.71 (1.68) (10.03) Source: Calculated using NAVs of all Ms from inception to 31 st December, 2016 Figure 5: Sharpe Ratio of Ms and Benchmark Index (Since 12 th August, 2013) Sharpe Ratio Source: Data of table 4 209

13 Others Ms have successfully beaten the benchmark return since 12 th August, 2013 with ICICI being the top performer and further followed by Kotak, SBI, Reliance and UTI RSL. The Coefficient of Variation of Ms is within a narrow range from 9.60 to and value of R-square is almost one in all cases. The value of Beta Coefficient of HDFC (0.18) is the lowest among all Ms followed by LIC (0.24). The values of Beta Coefficient of other Ms ranged from 0.79 (Reliance ) to 0.95 (SBI and ICICI ). LIC and HDFC are generating the highest value of Jensen s Alpha and Treynor s Index. The Sharpe Ratio of LIC is less than the Sharpe Ratio of benchmark index. The Sharpe Ratio of other Ms is however more than the Sharpe Ratio of benchmark index. Further, Two-Way ANOVA has been used in the present study to validate the hypothesis as mentioned above. The differences between the quarterly returns of different Ms and the differences between quarterly returns under the segment have been studied for any statistically significant differences. The results of the Two-Way ANOVA are given in the Table 5 and 6. Table 5: Results of Two-Way ANOVA of Corporate Debt (Tier-II) Scheme taking Actual Date of Inception of the Scheme Dependent Variable: Returns Source Type III Sum of Squares df Mean Square F Sig. Corrected Model (a) Intercept M QUARTER Error Total Corrected Total a R Squared =.525 (Adjusted R Squared =.407) Source: Calculated using SPSS from NAVs of various Ms Table 5 shows that when actual date of inception of the scheme by a particular M was taken for analysis, the difference between the quarterly returns of various Ms was statistically insignificant at 5 percent level of significance as the p-value was higher than However, the difference between returns of the segment on different quarter dates was found to be statistically significant in this case. 210

14 Table 6: Results of Two-Way ANOVA of Corporate Debt (Tier-II) Scheme taking Common Date ( ) of Inception of the Scheme Dependent Variable: Returns Source Type III Sum of Squares df Mean Square F Sig. Corrected Model (a) Intercept M QUARTER Error Total Corrected Total a R Squared =.891 (Adjusted R Squared =.863) Source: Calculated using SPSS from NAVs of various Ms Similarly Table 6 shows that the difference between the quarterly returns of various Ms and difference between returns of the segment on different quarter dates were statistically significant at 5 percent level of significance when a common date of inception i.e. 1 st August, 2013 was taken for analysis. 6. Conclusion From the above discussion it can be concluded that the performance of LIC and HDFC is not satisfactory as they are unable to beat the benchmark returns however they were generating higher returns than risk-free rate of return in Since inception category. The LIC and HDFC have the larger unique risk as compared to others. The performance of ICICI is superior to others. The performance of SBI, Kotak, Reliance and UTI RSL is also good. The difference between returns of various Ms was statistically insignificant when actual date of inception was taken however the difference was statistically significant when a common date of inception was taken for analysis. The difference between the returns of the segment on different quarter dates was statistically significant in both cases i.e. when actual date and common date of inception was taken for analysis. References Annapoorna, S. M., & Gupta, P. K. (2013). A comparative analysis of returns of mutual fund schemes ranked 1 by CRISIL. Tactful Management Research Journal, 2(1), 1-6. Retrieved from Ashraf, S. H., & Sharma, D. (2014). Performance evaluation of Indian equity mutual fund against established benchmark index. International Journal of Accounting Research, 2(1), Bahl, S., & Rani, M. (2012). A comparative analysis of mutual fund schemes in India. International Journal of Marketing, Financial Services & Management Research, 1(7), Retrieved from Gohar, R., Ahmed, S., & Niazi, U. (2011). Performance comparison of mutual funds in Pakistan. African Journal of Business Management, 5,

15 /AJBM Jain, S. (2012). Analysis of equity based mutual funds in India. IOSR Journal of Business and Management, 2(1), 1-4. Retrieved from Narayanasamy, R. & Rathnamani, V. (2013). Performance evaluation of equity mutual funds (on selected equity large cap funds). International Journal of Business and Management Invention, 2(4), Retrieved from Nimalathasan, B., & Gandhi, R. K. (2012). Mutual fund financial performance analysis- A comparative study on equity diversified schemes and equity mid-cap schemes. EXCEL International Journal of Multidisciplinary Management Studies, 2(3), Retrieved from Pension Fund Regulatory and Development Authority. Pension Bulletin, 2016; 5(8): Retrieved from Prajapati, P. K., & Patel, M. K., (2012). Comparative study on performance evaluation of mutual fund schemes of Indian companies. Research World-Journal of Arts, Science & Commerce, 3(3(3)), Retrieved from Qamruzzaman, Md. (2014). Comparative study on performance evaluation of mutual fund schemes in Bangladesh: An analysis of monthly returns. Journal of Business Studies Quarterly, 5(4), Retrieved from Rao, S. N., & Ravindran, M. (2002, December 16-18). Performance evaluation of Indian mutual funds. Paper presented at 15 th Australasian Finance and Banking Conference, Sydney, Australia. Retrieved from 212