The National Pension System (NPS) could offer subscribers greater exposure to alternative investments as pension fund managers look to diversify retirement portfolios beyond traditional equities, government securities and corporate bonds.
Investments in alternative investment funds (AIFs), real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) could provide additional sources of income and long-term growth. However, these investments also carry risks, including lower liquidity, valuation uncertainty and the possibility of losses.
Pranay Ranjan Dwivedi, MD & CEO of SBI Pension Funds (SBIPF), believes a measured allocation to alternative assets could help strengthen retirement portfolios over the long term. He suggests an initial allocation of around 2-3% of a retirement portfolio to alternative investments, which could gradually increase to 5%, subject to regulatory limits and the availability of suitable investment opportunities.
The discussion comes as the Pension Fund Regulatory and Development Authority (PFRDA) reviews the NPS investment framework. The expansion of investment options could allow pension funds to tap opportunities in infrastructure, real estate and private businesses, while giving subscribers greater diversification over their long investment horizons.
Can alternative investments improve risk-adjusted returns over 10-20 years?
Alternative investments have the potential to improve risk-adjusted returns over a 10-20-year investment horizon, but the benefits are not automatic, Dwivedi said.
Different categories serve different purposes. Private equity investments provide exposure to business growth, while private credit, real estate and infrastructure investments can generate income. Certain long-duration investments may also offer additional returns in exchange for accepting longer holding periods.
Real estate and infrastructure investments can also provide some protection against inflation. Rental income and contractual revenues from certain assets may rise over time, helping retirement portfolios preserve purchasing power, depending on the underlying contracts and costs.
However, the outcome depends heavily on investment selection and fund management. Dwivedi highlighted the importance of choosing the right managers, entering investments at reasonable valuations, controlling fees and having credible exit strategies.
Liquidity is another important consideration. Unlike listed shares and conventional bonds, some alternative investments can be difficult to sell quickly. AIFs, in particular, may have longer investment periods and restrictions on exits. This can become a concern if pension funds need to rebalance their portfolios or meet liquidity requirements.
Therefore, pension fund managers must assess whether the potential returns justify the additional risks before committing subscribers’ retirement savings.
Will greater exposure to alternative investments make NPS more complex?
Greater exposure to alternative investments could make NPS portfolios more complex, particularly because private market investments can be harder to value and monitor than listed securities.
Dwivedi said the responsibility for evaluating these investments should rest with professional pension fund managers. They must clearly communicate where subscribers’ money is invested, why an allocation has been made, what it costs and what risks it carries.
He pointed to global pension investors such as Canada’s CPP Investments, which invest in private equity, private credit and real assets alongside traditional investments. Their experience highlights the importance of professional expertise and strong governance.
SBI Pension Funds has a dedicated investment and research team, including chief investment officers for fixed income and equity, a head of research and a vice-president for investments, supported by a risk management team.
Dwivedi also highlighted the NPS Trust‘s Bharat Fund of Funds initiative, which provides institutional support through centralised evaluation, due diligence and ongoing monitoring of eligible AIFs. Pension funds, however, retain their investment responsibilities.
PFRDA, NPS Trust, pension funds and AIF managers all have a role in ensuring subscribers receive clear information about these investments.
Ultimately, alternative assets could help NPS portfolios balance growth, income and resilience over longer investment horizons. But for retirement investors, diversification should not come at the cost of inadequate risk management or liquidity.