Make NPS automatic

Can you think of a cricketer who is a very useful but not flashy player, so almost never gets selected for the team? I'm sure you can, but if you think of people's investment portfolios as a cricket team, then that player's name is the National Pension System.

The NPS makes me sad. Among all investment options available to savers in India, the National Pension System (NPS) is the most underexploited. More than any other investment class, there is a significant disparity between its suitability for every saver and its actual utilisation.

Here's a statement that will probably surprise many of my readers: given its actual characteristics, NPS should be the primary long-term investment of every saver. After one has taken care of the basics, that is, emergency money, term insurance, and health cover, it should be considered the first among the rest. Ideally, investors should only turn to mutual funds or equities once they've fully utilised NPS or for those requirements that NPS can't meet. However, hardly anyone does this. If I talk to a thousand mutual fund investors and inquire whether they voluntarily use NPS (excluding those who have it through their employers), only a handful would say yes.

The reason is a simple but harsh truth. Everyone in the business of investments knows that investment products are not bought; they have to be sold, and they are sold only if there's money in selling them. The low-cost and straightforward characteristics of the NPS, which make it an excellent savings tool, are paradoxically the same factors that make it unprofitable for companies and individuals to endorse. It's not about a trivial sum of money but an amount that could rival earnings from selling competitive products. It's generally far worse than the sellers not being interested in pitching NPS. If they find a client who expresses interest in NPS, many sellers will actively bad-mouth NPS to divert the money to products that will generate a commission. It's true that initially, NPS had many problems, including taxation, the annuity obligation and more. However, over the years, all those have been fixed, and one can emphatically say that there is no real shortcoming to NPS any more.

At Value Research, we have always been acutely aware of this problem of 'deselling' NPS. That's why we have so assiduously promoted NPS right since the beginning: it's such a great product, but few are interested in talking about it. We cover NPS in detail, we carry NPS data just as thoroughly as we do mutual fund and stock data, and above all, NPS is a first-class member of our 'My Investments' portfolio tracker.

However, this kind of effort goes only as far as serving a select audience which knows how to take care of itself. Solutions that are driven by individual investors are all very well but can't anything be done on a systemic level? I firmly believe that NPS is such a good deal that one has to start with people somehow and eventually, there will be enough momentum. There was an incentive scheme announced a few years ago for small NPS accounts but that faced the same problem of selling. Perhaps the way around this is an automatic NPS account. Something like this already happens in the pension systems of some countries, including the UK.

When someone becomes a part of the formal financial system by, for example, getting a PAN card or a bank account, an NPS account could be opened automatically with some default settings. This could be linked to a tax-saving investment that's almost automated. As in the case of mutual funds, tax-saving investments make an excellent gateway investment to get savers to dip their toes into something new. Such a structure would require changes in NPS but would likely be worth it. I hope (and perhaps believe) that eventually, NPS will attract an increasing number of individuals due to its advantageous returns, comparative security, and affordability. Over time, a growing proportion of people will choose to allocate their flexible savings towards the NPS. It's just that the path needs to be made easier to start on.