The National Pension System (NPS) in India offers investors the choice of investing in various asset classes, including equities, corporate bonds, government securities, and alternative assets. The debt portfolio of NPS primarily consists of government securities, corporate bonds, and other fixed-income instruments.

While investing in the debt portfolio of NPS offers certain benefits such as stable returns and diversification, there are several hidden risks associated with it:

1. Interest Rate Risk: Debt securities are sensitive to changes in interest rates. When interest rates rise, the value of existing bonds decreases, leading to capital losses for investors. This risk is particularly relevant in a scenario of rising interest rates, as it can impact the overall performance of the debt portfolio.
2. Credit Risk: Corporate bonds and other debt instruments included in the NPS debt portfolio carry credit risk. This risk arises from the possibility of the issuer defaulting on interest or principal payments. Investments in lower-rated bonds or bonds issued by financially weak companies may carry higher credit risk.
3. Liquidity Risk: Debt securities may also face liquidity risk, especially in the case of less actively traded bonds or during periods of market stress. Investors may find it challenging to sell their holdings at desired prices, leading to potential losses or difficulty in portfolio rebalancing.
4. Inflation Risk: Fixed-income investments, such as government securities and corporate bonds, may not offer adequate protection against inflation. If the rate of inflation exceeds the returns generated by the debt portfolio, investors may experience a decline in real purchasing power over time.
5. Reinvestment Risk: When interest rates fall, investors face reinvestment risk, meaning they may have to reinvest their coupon payments or principal repayments at lower rates, potentially reducing overall portfolio returns.
6. Regulatory Changes: Changes in regulatory policies or taxation related to debt investments can impact the performance and attractiveness of the NPS debt portfolio. For example, alterations in tax treatment or investment guidelines can affect investor returns and portfolio composition.

It’s essential for investors to be aware of these risks and assess their risk tolerance and investment objectives before allocating funds to the debt portfolio of NPS. Diversification across different asset classes and periodic review of investment strategies can help mitigate some of these risks. Additionally, seeking guidance from financial advisors or experts can assist investors in making informed decisions regarding their NPS investments