VR Logo

Freedom of Choice

In a decade or so of budget watching, this is the first time I find myself honestly able to say that there have been real reforms in the way the government encourages savings

In a decade or so of budget watching, this is the first time I find myself honestly able to say that there have been real reforms in the way the government encourages savings. This morning, Mr. Chidambaram has set free those Indians who save. Till now, the government told you how much you could invest in what kind of assets if you wanted tax breaks. Now, savers are free to make their own decisions.

You will now have a pool of Rs 1 lakh (itself much larger than the earlier limit which was Rs 60,000) which you are free to put into insurance, PPF, mutual funds or a host of other investment avenues in whatever mix you like. You are free to invest as much or as little in any type of investment that you want. If you believe in equity, you can put the entire lakh in an equity mutual fund. If you like safety, you can deposit the whole amount in PPF. And so on.

This is wonderful because it treats taxpayers as adults who can take their own investment decisions. It is also realistic because, for the first time, India's tax-rebate rules seem to recognise that every tax-payer is different and what is a good choice for one may be a bad one for someone else. An unmarried twenty-something call center worker whose parents can support themselves comfortably has very different financial needs from a middle-aged village school teacher who has children to educate and a large clan to support. Till now, the government forced both of them to invest in different asset classes in the same ratio. Now, each can invest in whatever is best suited for his or her own situation.

However, freedom always comes with responsibility. The fact that savers are free to make their own choices means that they can make the right choices or they can make the wrong choices. It also means that everyone who saves will have to spend some time and give a little thought to what their investment needs are, and what kind of risk they should or should not take. Investments of this kind are normally made for a very long period of time and over such periods, the effects of bad investment decisions can extract a large penalty. Till now, it was the government that was making investment bad decisions for most of us. From now on, we'll have no one to blame but ourselves.

This new freedom makes it imperative that investors educate themselves and also puts additional responsibility on the media to educate people. It also places additional responsibility upon the government to ensure honesty and transparency in the marketing and sales of savings instruments. Freedom of choice for investors should not mean the freedom to be led astray by crafty, emotionally charged advertising.

For example, the real situation on the ground is that while investment instruments like mutual funds and the various fixed income avenues are tightly regulated, insurance companies are aggressively pitching lucrative investment-disguised-as-insurance schemes to a market that is simply not sophisticated enough to understand what is being sold.

Now that Mr. Chidambaram has given the populace the freedom to make their own choices, he also needs to make sure that no one is able to dedicate massive marketing budgets to brainwashing people into making investment choices that are good for sellers but bad for the buyers.