Save-and-invest plans

Suresh Krishnamurthy

LIKE last year, there are now calls for the introduction of tax deferment incentives for employees on the model of the US Government's 401(k) plan. And the Government is considering seriously.

Investments in these plans would be apart from the mandated investments in the form of provident fund contributions. And these plans will be offered by mutual funds, which will manage the investments on behalf of investors for a fee.

A 401(k)-type pension plan would benefit investors who want to define the kind of benefits they wish to receive from an investment at the time of their retirement. This would benefit older investors who want to receive fixed sums at specified intervals. At the same time, such a pension plan would allow investors to direct their investments into the equity market.

This may be a desirable development for young investors as over the long-term, the equity market offer better returns than the debt market.

An investment in such a pension plan should not be compared to an investment in tax-saving options. In such a case, the 401(k)-type plan would appear less attractive since there is not likely to be a tax rebate but only a tax deferment on these save and invest plans.

These investments should be compared to existing investments, that is over and above the amounts saved in tax-saving options, made by an investor in order to secure his long-term future. Ideally, these investments should not be made out of the funds generally set aside for availing tax rebates. The criterion should ideally be the long-term financial, especially retirement, needs of an investor instead of the short-term perspective of tax rebates. Tax deferment is only an added incentive.

Overall, such a pension plan would introduce a greater degree of flexibility in the tools available to an investor to plan his retirement. It can benefit more investors who are at present not employed in the organised sector or if they are self-employed. From such a perspective, it would indeed be a welcome development.