NPS Gets a Boost: Pension Funds Can Now Invest in Gold-Silver ETFs and Nifty 250

The Pension Fund Regulatory and Development Authority (PFRDA) has announced major changes to the investment framework for the National Pension System (NPS), Unified Pension Scheme (UPS), and Atal Pension Yojana (APY). Under the new guidelines, pension funds can now invest in Gold and Silver ETFs, the Nifty 250 index, and Alternative Investment Funds (AIFs, Category I and II). This move is aimed at providing investors with more diversified exposure beyond the traditional debt-equity portfolio.

Portfolio Stability Through Gold and Silver ETFs

For the first time, government pension schemes like NPS and APY will include Gold and Silver ETFs. These asset classes are known for providing stability during market volatility. Historically considered safe investments, their inclusion can enhance the risk-adjusted returns of pension portfolios, giving subscribers a more resilient long-term investment.

Expanded Equity Exposure with Nifty 250

While the equity investment limit remains at 25%, the inclusion of the Nifty 250 index expands the investment horizon to large-cap and mid-cap companies. Additionally, the rule mandating 90% investment in the top 200 stocks remains in effect to maintain a balanced risk profile. Pension funds can also continue to invest in equity ETFs, selected BSE 250 stocks, and participate in IPOs/FPOs under specific conditions.

Government Securities Remain the Core

Government securities (G-Secs) continue to be the foundation of NPS portfolios. Pension funds can invest up to 65% of their portfolios in central and state government securities, along with PSU-backed fully serviced bonds. This category ensures long-term security and predictable returns for investors.

Corporate Debt and Credit Quality Standards

Corporate debt investments can now go up to 45% of the portfolio, but strict credit quality standards apply. Most bonds must have an AA or higher rating, with selective exemptions for AA- and A-rated bonds. Bank term deposits, municipal bonds, international institution bonds, and debt mutual funds are also permitted, with CDS-based hedging mandatory to mitigate risks.

Short-Term Instruments and Liquidity Management

Pension funds can allocate up to 10% to short-term instruments like treasury bills, commercial papers, certificates of deposit, and liquid funds. This allocation is crucial for managing daily cash flows and short-term obligations within the schemes.

Limited Exposure to Alternative Investments

Funds can invest up to 5% in structured and alternative assets such as CMBS, RMBS, REITs, InvITs, and asset-backed securities. Within this, investments in AIF Category I and II schemes are capped at 1%, which also includes Gold and Silver ETFs.

Strict Risk Management Rules

The new framework emphasizes risk control. Total exposure to any single industry cannot exceed 15% of AUM, while investments in sponsor group companies are limited to 5% for equity and 10% for non-sponsor companies. Similar net-worth-based limits apply to debt exposure, with InvITs and REITs capped at 3% overall, and per-issue limits of 5% for equity and 15% for debt instruments.

A Diversified Path to Higher Returns

With the addition of Gold-Silver ETFs, Nifty 250, and AIFs, the NPS and APY investment framework has become more diversified than ever. These changes are expected to reduce long-term risk and improve return potential, offering significant benefits to investors. PFRDA’s move modernizes pension investments to align with evolving market structures, providing subscribers with more robust and flexible options.