Yearly Return of 25% Through Scheme A Under NPS: Should You Invest?

In the world of retirement investments, the Alternative Investment Funds (AIFs) within the National Pension System's (NPS) Tier-I account, known as 'Scheme A', have been making waves. These funds, with a focus on Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), Additional Tier-1 (AT1) bonds, and securitized instruments, have delivered up to 25% returns over the past year.

However, the performance of these funds is not without its nuances. Regulatory restrictions limit the number of InvITs and REITs these funds can invest in, making their portfolios heavily reliant on a few names. This operational challenge results in concentrated portfolios, with Tata and UTI pension funds having over 80% of their Scheme A exposure in a few REITs and InvITs. The top two holdings in UTI Pension, or the top three in Tata Pension, account for nearly 80% of their assets.

One of the key investments in Scheme A is AT1 bonds, also known as perpetual bonds. These debt instruments, issued by banks with equity-like features, offer 100 basis points higher yields compared to government securities. A majority of Scheme A holds about one-third of its assets in AT1 bonds of banks like HDFC Bank, SBI, Punjab National Bank, Indian Bank, and Canara Bank. However, these bonds carry significant risks, including coupon payments that can be suspended or bonds that can be written down if the issuing bank faces a capital shortfall.

The better one-year performance of some funds like UTI Pension, Tata Pension, and ICICI Pru was driven mainly by the rally in Mindspace Business Parks REIT, Brookfield India REIT, and IndiGrid Infrastructure Trust. Pension managers that leaned more heavily toward top-performing REITs and InvITs recorded the best numbers. These funds have invested in six out of the 17 InvITs and five REITs listed in India.

Despite the volatility, the seven-year annualised point-to-point return averages out at 8.8% for the category, almost on par with debt mutual funds as of August 29, 2025. The operational challenges of Scheme A's limited size have kept its overall size restricted, with a total corpus of approximately ₹800 crore.

It's worth noting that exposure to Scheme A is capped at just 5% of the subscriber's corpus under the active choice option, and the 'auto' option does not offer Scheme A at all. This regulatory cap ensures that even if things go wrong, the damage to a retirement portfolio remains limited.

In conclusion, while Scheme A offers attractive returns, it is a high-risk, niche asset class that requires careful consideration due to its concentrated portfolios and reliance on a few key investments. Over the long term, REIT and InvIT returns in India tend to behave more like debt products, offering returns 1-2% above debt funds.