by Ms. ANURADHA SRIRAM,
Benefits Director - Tower Watson,
India
Investing in gold & real estate would not help you
build a substantial corpus for retirement.
We are a country of savers, with the average Indian
putting away nearly a quarter of what he earns. But are we also saving it
right?
Household savings in India are skewed towards physical
assets like real estate and gold. Such is the lure of owning property and the
yellow metal that these constitute nearly 64% of all household investments.
Physical assets offer poor returns and low liquidity.
Gold has been in a down trend for 2 to 3 years now.
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| ANURADHA SRIRAM, Benefits Director - Tower Watson, India |
Housing prices, though volatile, are also moving at a
sluggish pace.
According to the Reserve Bank of India, the year-on-year growth in residential
property prices shot up to nearly 28% in January - March 2013, but has now settled
at 4%. Likewise, the CPI housing rental index has moderated from nearly 15% in
April-June 2011 to around 5% now.
What does this mean for investors?
Leaning too much on physical assets can rob them of a
comfortable retirement because their savings may not be able to match
inflation. Also, the challenge in current financial investment avenues for
retiral savings is that the investment objectives are very different.
Most retirement options (PF, PPF, etc) are predominantly
invested in low-yield debt instruments. While inflation has averaged 10% over
the past five years, the real return on the formal pension assets has hardly
been positive.
Contrast this with the global pension experience, where a
significant chunk of pension assets is invested in equities.
According to a
study by the OECD, the pension assets in 24 countries had a real return of over
2% between 2008 and 2013.
Unfortunately, India was not among them. The weighted
average allocation to equities of these pension funds was 40.3%.
The impact is evident in the net replacement ratio (NRR)
in these countries. The NRR is the individual net pension entitlement divided
by net pre-retirement earnings.
If your last drawn salary was Rs. 1 lakh and your pension
is Rs. 80,000, the NRR would be 80%. A 2% difference in the rate of
return over a 30-year period of saving would lead to a difference of 8% to 12%
in the NRR.
It is good that Indians now have access to a pension
system that has all the right features. The NPS allows greater allocation to
equities, discourages premature withdrawals and offers greater transparency and
flexibility.
It also has an evolving investment governance framework and
oversight mechanism.
The NPS can fix a lot of problems for tomorrow's
retirees. But they need to act today, not 20 years later, when it may be too
late.
Ms. ANURADHA SRIRAM, Benefits Director - Tower Watson, India
https://in.linkedin.com/pub/anuradha-sriram/88/58b/bb4
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