The Hindu Business Line : Wanted: Retirement savings plans

On Labour Day in 1974, Gerald Ford, then the president of the US, flagged off the Employee Retirement Income Security Act, a legislation that spawned the IRA (individual retirement account). Thirty years and many assessments later, the IRA is still considered to be a grand experiment, perhaps fit enough to be followed in other countries.

The point to be noted is that mutual funds have been a key ingredient of IRAs, a fact that has been underscored by the Investment Company Institute (ICI) time and again. Quite justifiably, ICI, the industry body that represents fund houses in the US, considers the thirtieth anniversary of IRAs as a milestone.

The question is, can we not have something similar in India as well? The answer is simple. Yes, we can - and, indeed, we should - have a well-structured system of retirement saving. And we need the right sort of legislation to put it in place.

IRAs were devised as an incentive of sorts for employed folks, especially those who wished to save for retirement.

Indians, meticulous savers as they are, may well like such a system, provided they too are given enough incentives.

Let's take a quick look at the US scenario, courtesy figures made available by ICI. Over 40 per cent of American households own $3 trillion in IRAs, of which more than $1 trillion is invested in mutual funds. The number of households owning IRAs has increased from 29 million in 1996 to 45 million or so as of December 31, 2003. Also, IRA investments have shot up from over $600 billion in 1990 to what it is today.

Despite some positive trends seen in recent years, MFs are yet to become a popular investment vehicle for Indians. There is considerable scope, therefore, for their growth and inclusion in retirement strategies of individual investors.

As fund circles have pointed out over the years, Indian households remain underinvested insofar as MFs are concerned. This is quite clear from the comparative numbers (on savings & investments) that keep arriving from various quarters.

These numbers all portray a single picture: Indian savers are hooked to fixed-income options, especially bank deposits and postal savings schemes of various kinds. Funds are obviously not our preferred way of saving. Most of us are extremely conservative in our approach to the market. Even the most discerning investors in this country try to choose the safer options and avoid taking extra risks. Against this background, you have fund houses that have worked out multiple choices, keeping in view the varying needs of the investor fraternity. And, going by what one hears, there could be more choices in the days ahead, thanks to proposals on real estate and commodity funds as well as capital-guaranteed products.

A lot has to be done by our policy makers if an IRA clone, with MFs as one of its mainstays, has to make a mark in this country.

AMFI, the local industry body, needs to do its bit as well. We need more than solitary effort to set legislative action in motion. Of course, you have to choose the right schemes. Caution is needed as bad choices can ruin whatever investment strategy that you may have built carefully.

Feedback may be sent to nilanjan@thehindu.co.in

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