Find out what you should look at when choosing an NPS plan
29-Dec-2022 •Ashish Menon
Isn't the corporate fund option always better than Gsec in NPS, as NPS trust must be investing in very safe corporate bonds? - Anonymous
Corporate bond plans generally give better returns, but returns alone should not be the only factor under consideration when choosing between corporate and government plans. Risk factors should also be considered, like the credit quality of the plans' investments and their sensitivity to changing interest rates.
In terms of credit quality, the government bond plans are better positioned as they invest in sovereign bonds, which have an implicit government guarantee. While the corporate bond plans have similar exposure to high-quality investments such as AAA rated, AA+ rated, A1+ rated bonds and term deposits, even the ones rated AAA may default under extreme market conditions. Hence, from the perspective of the safety of investment, the government plans rank ahead of the corporate plans.
Interest rate changes
Bonds are sensitive to interest rate changes. Additionally, the average maturity of the bonds in the portfolio will determine the extent of price fluctuations when the interest rates change. The average maturity of the bonds under the corporate plan is five to seven years, whereas it is over 10 years for that of the government plans. This makes the government plans more sensitive to interest rate changes. However, since it's a long-term investment, you should not worry too much about it.
Hence, it cannot be said that the corporate debt plan is always better than the government bond plan.
Suggested read: An essential guide to National Pension System (NPS)