The Hindu Business Line : Retirement savings planning in India

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years: Warren Buffet

Five years is a long time in the financial markets. Or so many people would think. But one can actually entreat them to consider a simple concept that mutual funds (and other players who have a long-term stake in financial planning, saving and investment) have generally supported - individual retirement accounts (IRAs).

Enthusiasts can now derive pleasure from the fact that IRA or its equivalent is fast coming of age in certain other markets, courtesy models that may partially be considered for adoption in India as well.

A recent communication from Investment Company Institute (ICI is the association of funds in the US) refers to what has been described as `30 Years of Savings' and the fact that the IRA has "grown to represent one of every four retirement dollars in the United States".

As things stand, there is a $3 trillion IRA market in that country.

The point we are trying to make, however, is that the size of the pie is only a small part of the IRA saga. As ICI itself has suggested, individual savers have responded well to incentives provided by the government to create retirement assets.

Such incentives seem to have worked well in the US, where the rulebook has been kept simple and efficient.

The IRA provides a tool for workers to roll over their retirement savings; it also enables them preserve their assets because not many draw from their nest eggs before retirement. The idea is to help people (that is, those who have assigned such assets for retirement) remain committed to their goals.

"In 2001, Congress increased the annual contribution limits for the first time in 20 years and encouraged more saving by workers 50 and older by permitting `catch-up' contributions.

In response, American workers took advantage of these changes and deductible contributions to traditional IRAs rose to $9.5 billion in 2002, the largest amount since 1990", ICI has pointed out.

For the record, over 45 million (or 40 per cent) households in the US hold IRAs. They cut across income groups and educational backgrounds - a fact that makes the IRA one of the most significant vehicles for retirement savings.

The retirement savings scenario in India does not compare favourably with this at all. As the popular saying goes, retirement saving in this country is still about having more sons!

While such an extreme assessment can certainly be questioned by the contemporary Indian, the truth is that not many people here think cogently when it comes to planning and investing for retirement.

It needs to be seen whether mutual funds, especially equity funds, are actually used by our investors to further their retirement strategies in future. We are seriously under-invested in this regard - not a lot of money is put into equity funds.

The situation, however, is changing, a trend that is evident from the kind of money that new equity offerings have recently collected.

Whether that money really stays back, whether investors stay loyal beyond the short-term, whether fund houses will continue to tap large pools of resources... well, those are completely different issues.

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

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