You go out on a Saturday morning for a game of cricket. Your team wins the toss and you start batting. It is 10 overs a side and your side scores 55. You consider this a good score, and are happy with that. You are a little disappointed with the 4 LBW decisions which went against you, but you have no choice now.

Just as the other team is supposed to start batting you are told…’we have considered ..and decided that for the other team there will be no LBW’ – now go and bowl.

Would you feel somebody hit you in your solar plexus?

You do not think that the Rules of the Game should be changed HALFWAY through the game.

However, please be sure that there is only ONE opponent who can do this. The Ruling Government.

They give you products with many terms and conditions. YOU have to anticipate that this will change. YOU cannot assume that the rules will remain permanent. THEY tell you that the rules can change. That is the risk.

Now what do you believe about PPF?

it is tax free

you will always get around 8% interest or higher (but Subra sir it has never gone below that you know?)

it can be extended permanently

you can withdraw some %age after 7 years of being invested

Let me tell you what changes you should expect from a government which is perennially short of funds:

  1. Each installment is locked in for 15 years (like elss)
  2. Interest will be 8% till the balance reaches Rs. 20L but after that it will be 5%
  3. Cap of Rs. 50 Lakhs. Beyond that there will be no interest.
  4. For people with more than Rs. 50L income PPF interest will be taxable
  5. There will be a 1% TDS on withdrawal – you can claim it as a refund.

Outlandish? No. Governments have done things far far worse than this.

Your heart will bleed if you see what the government has done to small farmers. I am stunned that they have not just gone beserk and done something like the October revolution of 1917. This is very small.

You want proof? If you are below 50 years of age go and ask your parents about a scheme called CDS – Compulsory Deposit Scheme started by Ra Ga’s grandmother. It worked as follows – 10% of your income would be deposited in a bank account called ‘cds’ and will be returned to you after one year. So next year you would pay again, but you will also get your previous year’s contribution.

IG just said ‘we will not pay now’…then the scheme itself got abolished.

IG again – this time with National Savings Certificate. When the paper was issued we were told it will double in 5 years. One day in June IG woke up and said ‘all nsc issued from Jan..will double in 5.5 years’ – she REDUCED THE INTEREST rate AFTER you had contracted and invested. Of course you could do NOTHING.

So what is legislative risk?

Legislative risk is the risk of some future PM or FM changing the law to suit them without worrying what impact it has.

I have NOTHING against such changes. Stop pretending that you are prepared for it. YOU ARE NOT. Sorry for holding the mirror to your face….

 

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  1. It happens only in India? Still happy no haircut on deposits thus far. How long this happiness lasts, none knows.

  2. Dear Subra

    Investor has to invest with these inherent risks . We as a country are more aware of this than the west and that is why people here keep money locked in real estate and gold as we dont trust the govt.
    These risks also exist for your favourite asset class equity – imagine you did a SIP till retirement and suddenly at that time the govt. imposes 20% LTCG on equity ? Additional 3% cess for smart city ? SEBI closes the stock exchange for 1 year ?
    Always keep a margin – safety net on your investment to account for the unknowns .

  3. unfortunately that is the basic premise of democracy – we elect our representatives and allow them to change the rules of the game, as long as it favors the majority. as a minority, you can crib that the majority is financially immature & ignorant – just have to live with it 🙂

  4. @param, you are right about the basic premise or fallacy of democracy. Democracy in itself doesn’t assure or guarantee anything. Which is why any democracy must have a written constitution that is fair and just for all citizens of the country. If and only if a fair and just constitution and supporting legal framework exists, can we have a ‘Functioning’ democracy. Any government, no matter winning with absolute total majority, cannot make unconstitutional laws. If it does so, and such unconstitutional deeds add up, there is a big chance of a total revolution and civil war.

  5. Param, you are confusing mobocracy with democracy.we are a constitutional republic, not rule by majority.
    Btw, law is not synonymous with statutory legislation.. though thats the impression most people carry after 10 years of brainwashing in civics schooling

  6. One way you can mitigate the legislative risk (not eliminate, but reduce) is to invest in products which has a strong political base and voice. See what happened to the EPF taxation proposal – the middle class erupted in anger and screeched in one voice that they won’t vote for the ruling party and the sh** scared govt beat a hasty retreat.
    You can be sure for e.g, future FMs will think many times before fiddling with EPF’s EEE status after this quick surrender. May be the PPF will have a lesser chance of avoiding tax in future, as it has no strong interest group involved in it. Caveat emptor!

  7. I don’t think this rolling back decision is permanent. It will happen in the future. So many modifications were done to many schemes earlier. Jaitley was just testing the waters, wait till a situation is comes (or create it) where ppl cannot say no, like promising that it is only for a short period or reduce the opposition by saying such rule is for “rich” and so on.

  8. Aren’t we reading too much into reversal decision? There was a conspiracy theory on the day of budget that FM using it as a decoy so that other shortcomings in the budget don’t get highlighted and all blame game will happen over this one point(role Digvijay Singh played in last government 😉 )and it was always going to be revoked. Looking back, there are chances this might have been the case.

  9. totally agree with aniket. so much coverage on one item has allowed all to forget that service tax has moved to 15% now 🙁

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