A month ago, I had pointed out how messy the bevy of Indian retirement products has become. They were shaped over the years by the fitful overlay of various new schemes, each influenced by different incentives, product design, taxation and regulation. I wondered whether the Union Budget would at least usher in a principled approach, if not streamline all products right away. Not only was this not done, but the Budget has added to the confusion.
On Budget day, I wrote in this newspaper that financial consumers must wade through the confusion created by policymakers by sticking to a few chosen products and ignoring the rest. I realise that the government will continue along the haphazard path of adding more savings and investment products, without a plan or a principle, not to speak of an overarching vision that knits all of them together. Assuming that it is too much to expect such basic change, can we at least have one more financial product that could potentially transform the lives of the poor and the lower middle class?
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India has some 24 different investment products sold by different arms of government and the intermediaries registered with four financial regulators. Savers find it difficult to choose the right one. The regulator and sellers would like this misunderstanding to continue.
A majority of these 24 products (maybe even 80 per cent) are pushed harder than the rest. They take advantage of savers' behavioural biases, which are: wanting safety; a difficulty in dealing with volatility; the inability to invest for the long term, or to calculate inflation-adjusted compounded returns. These behavioural biases are satisfied by investing in low-return fixed-income products that protect the principal, such as money-back schemes, annuities of insurance companies or bank fixed deposits - even if they deliver poor returns.
A small number of products (may be just 20 per cent) deliver superior returns but are volatile. These are equity products. Savers sometimes try to dabble in them. In the process, they fall for another behavioural bias - the herd instinct. Many burn their fingers and swear never to touch them again. All this is tragic, but policymakers globally accept this behaviour as natural. Look at this example. The UK government has now set up something called the Money Advice Service. It calls itself "free and impartial money advice, set up by government". One of the pages on the website tells savers: "Beware hazardous savings and investment products." Now, shouldn't a government disallow hazardous savings and investment products, rather than allow them to be sold and advise savers to guard against them? But this is the cornerstone of the UK savings and investment architecture.
I realise it is too much to expect that we can move to a principle of "Less is More" and "Seller Beware". So can we at least have one more financial product, please, that will be aimed at the poor and deliver the rich man's privilege of higher returns from equity products? The product can be transformative and truly make people well-off without their knowing anything about it. Here is the idea.
The government can set up a scheme called the Deen Dhan scheme (named after Deen Dayal Upadhyaya, of course). The minimum holding period of the scheme can be 20 years. Where will the scheme invest? The government should learn a trick from life insurance companies and refuse to disclose where the money is invested. In reality, the money could be invested in blue-chip stocks. The scheme, run by top mutual funds, can be guaranteed to deliver 11 per cent a year plus bonuses (to borrow another trick from the insurance companies). Over the past 20 years, the Nifty has delivered 13 per cent compounded annual return. The government can backstop a temporary shortfall, if any. After all, it would be doing so for the poor. It can sanction loans and against accumulated corpus, and also allow withdrawal from time to time when the market is not too undervalued. The maximum contribution to the scheme could be Rs 1,000 a month, so the well-off are not tempted to take advantage of it.
This would be the first time poor people are connected to the riches of the stockmarket, bypassing all the hurdles the regulator sets up, the huge knowledge gap and the many behavioural biases of savers. They don't need to know anything about stocks. The scheme shields them. For that matter, it is not that educated, well-heeled people invest their money with full knowledge of financial products either. Many make awful mistakes, losing crores.
As I have explained several times, there is something inherently flawed in lecturing savers to do their homework and be careful about hazardous products. If we cannot change this thinking, we should bypass it - with a scheme that works by itself, without savers having to be financial experts. Along with insurance schemes announced in the Budget, if the government brings in this automated investment scheme for the poor, India can show the world how a simplified architecture of investment products, that meets the needs of 80 per cent of the population, ought to look.
The writer is the editor of www.moneylife.in