The Hindu Business Line : Retirement plans

LEGISLATIONS mooted by politicians in foreign countries do not bother us too often but a proposal in the US to introduce what has been called the GROWTH Act does cry out for attention.

The reason is simple: The idea behind GROWTH, or `Generate Retirement Ownership Through Long-Term Holding', is not merely interesting; it will fire up investors everywhere.

For those who are not clued in, the proposal, introduced by two peoples' representatives in the US on May 5, has already found great support from several quarters. The legislation, if passed, would provide tax relief for those who invest in mutual funds with a view to meeting long-term goals such as retirement.

MFs are required to distribute their net capital gains each year, states Investment Company Institute (ICI), the US body that represents the local asset management industry; investors with taxable accounts are required to pay taxes on such distributions even though they decide to have these distributions automatically reinvested and take no action to realise these gains.

The GROWTH Act would allow investors to defer the tax on reinvested distributions until the units are redeemed. This, ICI feels, is "consistent with the popular understanding that capital gains taxes are not due until you sell the investment".

The Institute is also of the view that such measures will advance long-term savings and investment goals of the investor fraternity.

It may be mentioned here that ICI members include several thousand mutual funds. Its members have total assets of roughly $8 trillion; these funds serve about 87 million shareholders in more than 50 million households.

"The GROWTH Act would defer taxation... That keeps more retirement savings invested longer and growing longer by taxing income when it is withdrawn, not savings while they are being built up," the ICI Web site has quoted Mr Paul Stevens, President, as saying. You will have to refer to www.ici.org for more.

The concept of saving for the long term is old chestnut. However, investors, including those in developing nations such as India, must realise that they may have to retire from active work sooner than they think, a scenario that should immediately compel them to start planning for their retirement.

Investors here, in their endeavour to create the best-possible portfolios, must further broadly consider the relevance of mutual funds. In certain large markets, ordinary households rely heavily on professional investment outfits.

Average investors also make use of financial planning services extensively. Many of them also actively express their desires to own relatively low-cost funds.

It is a bit early to suggest that the Indian market too will start displaying these trends. Statistics collated locally indicate that the common man is generally divorced from the concept of long-term planning. Retirement is not viewed in the proper sense.

The stock market is often looked down upon. Equities are still a strict no-no for many of us. In comparison, fixed-income instruments, especially those offered by government agencies, have so many takers. Hopefully, all this will change. And with a bit of luck, old habits will give way to new ones.

The days of investing anywhere and also getting high returns in the short run are becoming more and more difficult. An investor should have some patience and attempt to look at any investment with a time frame of three years to get good inflation adjusted and risk adjusted returns.

A K Sridhar, CIO, UTI MF

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

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