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If it's good, they will come

NPS is a good scheme but a tough sell if the return is not guaranteed. Such products need both wide publicity as well as reasonable incentives.

Harsh Roongta

04 Jan 2010

The story is about a Public Sector Undertaking (PSU) which came up with an ultimate refrigerator. With its lowest market price, standard features and much lower power consumption, it was quite a buy. The Company appointed a dealer network which was experienced in selling consumer durables of other manufacturers. Now that Company was confident of its superior product backed by good dealer network, it did not feel the need for any advertising budget and paid peanuts as compensation to its dealers. But there was no manufacturer warranty on the refrigerator.

The refrigerator was launched and now the time had come for the Company to take stock of sales after six months. The verdict was clear. Inspite of being a superior product, it was just not taking off. The customers were not even aware of the product. The dealers also made no attempt to sell the product to the customers who walked into their showrooms as they were not making any money. In fact, few customers who had read about the product in the newspapers, came asking for it were skilfully diverted to other competing products. Reason being - the dealers made more money on such competing products even though they were not as good.

Clearly the manufacturers dogma that if you make a good product consumers will come and get it had taken a beating here.

If we substitute this analogy with the Pension Fund Regulatory and Development Authority (PFRDA) for the the PSU refrigerator manufacturer, Banks (Point of Purchase) for the dealers, the New Pension Scheme (NPS) for the new refrigerator and lack of guaranteed returns for the absence of warranty, you have the similar result.

Let's analyse the scenario here in detail:

The high household savings rate in India has been much touted. Perhaps this drives the thought that the savers/investors have no choice but to channel a part of their savings in this otherwise excellent long term savings scheme the National Pension Scheme. However, most Individual savers in India prefer traditional savings instruments such as land, gold and bank fixed deposits. One thing common among these instruments is that it requires one time investment with no obligations on making a regular contribution over time. In fact even here the relatively newer products such as PPF, NSC etc. which are safe and provide good returns also needed support from individual sales agents to make sure that the operational difficulties in investing in these products is taken care of.

This kind of investments naturally favours the relatively better off people since they would have the lump-sum available to invest. The whole concept of systematically saving and investing something over time to fulfil a financial goal requires discipline and commitment.

Considering this NPS is a good scheme and no doubt gives excellent results but it still is a tough sell especially if the return is not guaranteed. As a result such products need both wide publicity as well as reasonable incentives for the selling. Unfortunately both are lacking in the otherwise excellent pension scheme. Thus perhaps leading to an excellent product, not ready to take off. (It is not just the current tax disadvantage that this product suffers vis--vis other savings products that is causing such low off take). Moreover the general awareness of the product itself is quite low.

Another potential future issue is the extremely low fund management charges paid to the fund managers. To give you an idea - if the fund house is managing Rs.10,000 Crores of funds, the total payout will be Rs. 9 lacs only which is not even enough to cover the salary cost of a single executive. Obviously either the managers hope to make some money in some other manner (brokerage etc. for their sister companies perhaps) or will perhaps loose interest in the business over time. Anyway this will become a problem only at a future date when the scheme becomes popular.

We hope that after the proposed tax changes take effect in 2011, we will also see changes in the selling structures and incentives for all the stakeholders in the NPS.

We wish that this unique scheme which can be a boon for Indian investors looking for long-term disciplined savings does not meet the same fate as that of mythical PSU Refrigerator manufacturer mentioned above.