The case for investing in NPS

I used to strongly recommend against NPS (National Pension System) because it doesn’t offer much flexibility to investors. It took me a while, but I eventually understood that NPS is a mass market product, and hence, it needs to account for the quirks of the “common people”. Recently I came across a few news stories that confirmed this.

News story 1: A vegetable vendor named Pradipkumar Vaishya has invested ₹4.55 crores in a Ponzi scheme called Torres. Reportedly, this capital belonged to him and others who invested through him. Torres shut down, taking with it many crores of rupees from investors like Pradipkumar Vaishya.

News story 2: A retiree has invested his entire life savings in an invoice discounting platform. He lost all his money when the firm shut down without notice. Many other investors have lost their capital too.

When looking at all this, it makes sense that NPS forbids people from squandering their retirement corpus. If falling for outright scams is one way to lose money, making emotional decisions is another.

You retire with a corpus that looks huge (but in reality it may be just enough to keep up with inflation). Someone in your family wants to borrow 10 or 15% of your corpus for some need. You think you have more than enough, so you lend it to them. They are never able to return the money. Inflation does its thing, and you are penniless in your final years. Or, maybe the borrower returns the capital without interest after 10 odd years, and you have lost a significant amount of interest that could have somewhat bridged the gap between inflation and your corpus.

A typical “common person” in our society is not good with money management. They are especially bad when it comes to living for a few decades off a corpus. Living off a corpus is a qualitatively different skill than managing one’s expenses with regular (or even irregular) cash inflow. Life doesn’t prepare us for it; we need to figure it out after we have retired. The vast majority of us will make mistakes. Some (many?) mistakes can have irreversible negative impact. It is an extremely hard problem.

NPS acknowledges this challenge and forces people to take a monthly pension. Even if the investor squanders all the money they have access to, the pension corpus stays intact and they’ll continue to receive some monthly cash flow.

I have strong opinions about how to invest my money. You—someone reading a blog post like this—also likely have strong opinions. NPS is most likely incompatible with our ideas and goals, so NPS is probably not a good fit for us. But we are outliers. For most people, NPS is a fine choice.