New Investment Avenues Open Up for NPS Subscribers

The Pension Fund Regulatory and Development Authority (PFRDA) has recently introduced significant changes to the National Pension System (NPS), offering subscribers a wider array of investment choices to potentially enhance their retirement savings. In a circular released on December 10, 2025, the PFRDA announced that NPS funds can now invest in gold and silver Exchange Traded Funds (ETFs), Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and other instruments. These changes aim to provide pension funds with more legitimate avenues for diversification, while also implementing strict caps to prevent over-exposure to any single riskier asset.

Gold and Silver ETFs

For the first time, NPS funds are officially permitted to invest in gold and silver ETFs regulated by the Securities and Exchange Board of India (SEBI). This inclusion allows subscribers to add precious metals to their portfolio, potentially providing stability. For subscribers in the Non-Government Sector (NGS), which includes retail investors and High Net Worth Individuals (HNIs), gold and silver ETFs are grouped within the equity category (Asset Class E). This category also includes REIT units and equity-oriented AIFs, with a combined exposure limit of 5% of the equity allocation. It's important to note that this 5% is a combined limit, not a separate limit for each item. Government Sector (GS) schemes face even tighter restrictions, with separate caps of 1% of the scheme's total assets for both gold and silver. Pension Funds are permitted to charge investment management fees on these ETF holdings.

Alternative Investment Funds (AIFs)

The PFRDA has also outlined clear conditions for NPS funds to invest in AIFs. Only Category I and Category II AIFs are permitted, and each AIF must have a minimum corpus of ₹100 crore. Furthermore, pension funds cannot invest more than 10% of an AIF's total capital. For NGS schemes, debt-oriented AIFs are grouped with Infrastructure Investment Trust (InvIT) debt and Basel III Tier I bonds, with a combined exposure limit of 5% of the debt allocation. Equity-oriented AIFs are grouped with gold and silver ETFs and REIT units, also with a combined exposure limit of 5% of the equity allocation.

Other Investment Options and Restrictions

The new guidelines also allow NPS funds to invest in other instruments, including:

• REITs and InvITs: Investing in real estate through REITs and InvITs is now part of the NPS investment mix. Government schemes require these trusts to have a top AAA rating, while non-government plans accept slightly lower AA ratings.
• Municipal Bonds: These bonds, known for funding local projects, are now eligible investments, but only highly rated ones to mitigate risk.
• Government Debt ETFs: NPS funds can now invest in Government of India Debt ETFs.
• Initial Public Offerings (IPOs): Pension funds can also invest in IPOs, follow-on public offers (FPOs), and offer-for-sale (OFS) of companies approved by SEBI, provided they meet certain criteria.

Stock-market exposure has been restricted to a ceiling of 25%. At least 90% of the fund assets must be invested in the top 200 stocks of Nifty 250, with flexibility to include BSE 250 constituents not present in Nifty 250. This is to ensure portfolios remain anchored to large and liquid companies.

These revisions aim to build more diversified and resilient pension fund portfolios across different asset classes. According to Kurian Jose, CEO of Tata Pension Management, these changes are "an excellent step towards making NPS investments contemporary by enabling multiple avenues providing diversification and return enhancing options to the investors". The new framework introduces crucial diversification and access to specialized asset classes, enhancing the potential for higher risk-adjusted returns without compromising the system's fundamental safety.