There were some announcements recently by the Life Insurance Council, a lobbying body formed by life insurance companies. Broadly, these announcements appeared to say two things: that the terminology of unit-linked insurance plans (Ulips) would be made uniform and that insurance companies would refuse to underwrite insurance-linked schemes issued by mutual fund companies.

Behind these announcements is the ongoing struggle between life insurance companies and mutual funds. Mutual funds and life insurance are two distinct products, one intended as a savings vehicle and the other a safety net. However, this distinction has blurred over the last few years. Indeed, one gets a feeling the life insurance companies are also in the business of running mutual funds, categorised somewhat differently as unit-linked insurance plans (Ulips).

Ulips have a mix of characteristics of both insurance and mutual fund schemes.
Crucially, however, the mutual fund aspect of Ulips is regulated by the government under a very different set of rules compared with the real mutual funds.

From the investors’ point of view, the biggest difference between the two categories pertains to how much of his money is actually used for his insurance and his savings and how much is taken away to pay commissions to agents and towards the insurance company’s expenses. The second big difference is in the quality of the information he is given about his investments.
Mutual funds deduct less than 2.5% as the agent’s commission. And as per current norms, there is no deduction if investors don’t use an agent and go directly to a fund company.
In Ulips, on the other hand, the agent’s commission varies, but in the first year, it could be as high as 25% and more.

Next is the issue of transparency.

There is a vast difference between the meaning of net asset value (NAV) of Ulips and mutual funds.

In a mutual fund, the NAV announced is net of all expenses and charges the fund company deducts. If your investments were worth Rs 1 lakh when a fund’s NAV was Rs 22, then it will be worth Rs 2 lakh when the fund’s NAV is Rs 44. That’s it.
The arithmetic of insurance companies is different. NAVs of Ulips are effectively pre-deductions. The NAV may double, but your investments won’t double because the insurance company will reduce the number of units you hold to pay for expenses and commissions etc. This means the announced NAV has no clear and transparent relation to what the unit holders are actually earning.

However, Ulips have been the more successful of the two. News reports say that last year, a total of Rs 55,000 crore was invested (if invested is the right word) in Ulips. In the same period, around Rs 16,000 crore was invested in mutual funds.
We are often told by the insurance industry that this is because Ulips are a superior product. That’s complete rubbish. Ulips are successful because the ultra-high commissions and charges make insurance agents far more aggressive salesmen than those of any other financial products. These charges also enable insurance companies to spend far more on advertising, all from the unit holders’ money. The net result of high-pressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, PPF, post office deposits and many other asset types is ending up in Ulips, where a good proportion is diverted to pay commissions.

The direction India’s insurance industry has taken in the last few years amounts to regulatory failure. This industry was opened up to foreign capital and provided with a relatively lenient regulatory framework so that it could bring insurance to India’s under-insured masses. Instead, it has ended up focusing its energies (and capital) on selling expensive and opaque mutual funds dressed up as insurance.

It’s tragic that there is no move to even recognise that this problem exists. Indeed, even higher foreign ownership is on its way, supposedly because more capital is needed to Ulip the under-Uliped masses.

But, even the mutual funds don’t seem to be very interested in highlighting these issues, perhaps because many of them are part of financial conglomerates with flourishing insurance businesses.

It is therefore left to the investor to understand the issues and do what he thinks is in his best interest.

Cross posted on Insurance Blog

Gold exchange-traded funds (ETFs) are back in the limelight. After a dull three-month period, a sudden slump in the US stock market last week has investors flocking to buy gold. In the past one week alone, gold prices have increased nearly 15 per cent in the international market.

As a result, investors, who invested in gold ETFs in the first half of this year, have reaped benefits. In the past one year, the average returns have been a stunning 31.42 per cent. In the last month alone, returns have been an impressive 13 per cent. The Bombay Stock Exchange?s Sensex, on the other hand, fell 3.45 per cent in the same period. Returns from equity diversified funds dropped by 4.72 per cent.

Gold ETFs track the spot price of gold and are listed on stock exchanges. Benchmark Mutual Fund launched the first gold ETF. At present, there are five players in the market, namely, Benchmark, Kotak, Quantum, Reliance and UTI.

Market experts, however, feel those who have missed the bus in the earlier part of the year will do well to wait till the festival season in India gets over. ?Gold ETFs have reached attractive valuations, but prices may fall as we expect the dollar to strengthen further,? said Sriram Venkatasubramanian, head, FCH Centrum Wealth Management.

According to Nipun Mehta, the executive director and head of Societe Generale Private Banking, gold ETFs should be a part of any portfolio as it gives stability as a hedge against inflation and is usually seen to be inversely correlated with other asset classes such as stocks, fixed-income securities and commodities. The sudden price rise is a just a temporary phenomenon, Mehta says.

The ideal route for the investor, who wants to invest in gold with a long-term view (three years or more), the person needs to follow the systematic investment plan (SIP) through gold ETFs.

Investing in gold ETFs will give the investor all the advantages of investing in gold while eliminating drawbacks of physical gold such as cost of storage, liquidity and purity. SIP investment enables the investor to accumulate units over time and average out the value of purchase through highs and lows. The units of gold ETFs can be redeemed either from the fund directly or from the market.

As far as the asset allocation goes, they should form only 5 per cent of the entire portfolio. ?Gold ETFs should form a smaller part of the portfolio. Ideally, it should not exceed 10 per cent of the entire investments,? added Venkatasubramanian.

There are a large number of tax advantages in investing through ETFs vis-a-vis holding physical gold. For instance, if an investor holds gold ETF units for more than a year, he qualifies for the long-term capital gains tax at 10 per cent (without indexation) and 20 per cent (with indexation). In case, the investor sells within a year, the transaction will attract the short-term capital gains tax, depending on the person?s income bracket.

On the other hand, investors have to hold physical gold for three years to qualify for the long-term capital gains tax. For less than three years, the short-term capital gains tax is charged at 30 per cent.

The Mutual Fund industry is concerned about insurance firms’ unilateral decision to prevent asset management companies from bundling insurance products with their own fund offers.

The Life Insurance Council, the apex body of the insurance industry, fired a fresh salvo on Thursday after its members decided not to offer any of its products to be bundled with mutual fund products from October 1.

Mutual fund houses said the move provided an unfair advantage to insurance firms.

“This move is anti-investor and is a move that creates monopoly of the insurance players to offer insurance,” said the head of a fund house on condition of anonymity Companies such as Reliance Capital AMC and Birla Sunlife AMC have been bundling insurance cover with their equity schemes.

Such schemes worked on the same princip1es on which an organisation buys a term plan for its employees.

The latest salvo by the insurance companies, mutual fund houses said, will deprive the investors to get a term plan on their mutual fund scheme.

AMFI had earlier made a proposal with the Sebi that mutual funds should be allowed to offer insurance Coler to the investors along with their mutual ftmd schemes. Industry sources, however, said that till the time mutual funds receive a formal communication, they could continue to offer the term insurance product along with their saving and imvstment schemes.

It is not just retail investors who are convinced about the power of the mutual fund (MF) as a vehicle of long-term wealth creation; many charitable organisations and trusts too seem to think so. According to industry sources, these groups have been steadily increasing their exposure to equities through mutual funds. There are many religious and nonreligious trusts out there which are deploying 60-80% of their long-term funds in equity schemes, fund industry experts say.

Swaminarayan Trust, Ahmedabad, Gujarat Cancer Society, Ramkrishna Mission, Tirumala Tirupati Devasthanam, Missionaries of Charity, Ram Janambhoomi Nyas, Ayodhya, Dyal Singh College Trust, Charities Aid Foundation India, Environment Support Group, Shwetambar Trust, International Centre for Entrepreneurship and Career Development, Birla Kalyan Nidhi Trust, Hindustan Charity Trust and Bombay Hospital Trust are some of the more prominent trusts which have been investing in mutual funds.

Many charities have surplus funds not needed to fund their immediate charitable activities; often, the trustees invest some or all of this surplus in order to generate extra income to fund future activities,? says the distribution head of a fund house that claims to have a handful of trust-focussed mutual fund schemes.

As per Indian Trust laws, religious organisations, charitable trusts, Wakf boards and registered societies are allowed to invest in mutual funds.

If you track mutual funds, chances are high that you would have seen at least one brochure advertising the benefits of investing in fixed maturity plans (FMPs) in the last 6-8 months!

AIG, Lotus India AMC, DSP Merrill Lynch MF, Fidelity, the list seems endless. As stocks become the most hated word, FMPs have emerged as favourites by simply combining small investments, tax savings and assured returns.

FMPs offer good fixed income. Their portfolios do not change much. Risk-averse investors and especially those falling into the higher tax brackets should go for these products.

With more than 27 fund houses having launched FMPs with tenures ranging from 3 months to a few years, FMPs are being lapped up by all and sundry as a viable alternative to fixed deposits in banks. The minimum investment of Rs 5,000 is attracting scores of smaller investors. By investing in debt instruments with the intent of holding them to maturity, FMPs are appearing to be a safer haven for all those who are fed up with falling share prices.

Sebi’s much-hyped entry load waiver for direct mutual fund (MF) applications seems to be having some positive impact, as investors are cashing in on the load-free route to apply for MFs.

According to a survey done by IIMS Dataworks on mutual fund retail sales and distribution practices, 33 per cent of independent financial advisors (IFAs) have admitted to a significant impact of the zero load on their business volumes.

An interesting finding of the survey is that individual agents are planning to form a ‘chain’ sales channel. A chain channel means organising themselves into a ‘union’ of sorts to increase their bargaining power with asset management companies (AMCs). More than 80 agents in super metros see their future in the chain sales channel.

The IFA survey also shows that expensive brand and product advertising by companies is having some impact, but not to the extent of growing MF customer base to mass market size. The asset management firms need to come together to devise strategies to educate both existing and potential investors.

IFAs, in the survey, report that most of their new customers are referred by their existing MF investors. In other words, most new customers are acquired by existing customers ‘talking up’ the market.

Rough weather in markets and high inflation have resulted in a slowdown of business for many IFAs. Consequently, the IFA community is under some stress and is willing to consider adjusting traditional business practices, according to the survey. An indicator of this is that many financial advisors are now willing to consider educed financial incentives.

The data clarifies that preferential sales issue for IFAs selling both mutual funds and life insurance products is reasonably benign as IFAs overwhelmingly report that mutual funds are easier to sell than the most popular insurance product at the moment (ULIPs) for various reasons.

The reasons for the claim, investors say, are because mjutual fund returns are more attractive. The fact that MF investments do not involve investment lock-in and a long-term premium commitment makes the product more investor-friendly, the survey says.

There are many investors who like to park their money as a lump sum into an asset class and forget about it. They don’t want to worry about what’s happening to it on a daily basis as long as the investment earns them some returns in the long haul

That’s not a bad idea at all and the safer the instrument, the lesser are your worries about returns

But there is another way this lump sum can be used — by investing a fixed sum at regular intervals. This method eliminates the need to time the market (making an entry or an exit) — an area where most investors are prone to go wrong. This method is commonly known as the rupee cost averaging. Under this system, one need not worry about when and how much to invest. A fixed sum of money can be invested regularly and over time it averages out the costs.

For instance, if one were to buy units of a mutual fund — by following rupee cost averaging, the fixed amount of money will fetch more units when the net asset value of the units are down, and vice versa.

What one must remember here is that what price you pay for a single unit does not matter but the average price at the end of purchase is what holds and the returns are based on this average cost

This automatically falls in line with the age-old principle of buy low and sell high

Rupee cost averaging, of course, does not inculcate the selling aspect. It only helps one average the cost of an asset purchaseThis helps in doing away with the volatility in the market since it smoothens out ups and downs.A look at the table shows how investing regularly can fetch you more shares of a stock through rupee cost averaging. In the above example, when investing in lumpsum, the share price was Rs 20 — meaning, you end up buying 500 sharesInstead, if one were to invest Rs 1,000 every month for 10 months, the total number of shares purchased adds up to 520, since these were bought at different price levels and the average cost of each share comes down to Rs 19.6And 520 shares would definitely fetch a higher return than 500 at the end of ten months.

Bharti Axa Mutual Fund has devised a new way to persuade investors to switch to the online model. The fund house is launching a plan under its maiden equity scheme, wherein investors opting to receive all communication through email will be charged 0.25 per cent discount on management charges.

The fund house is projecting it as a green initiative to reduce paper consumption, but rivals have termed it as a move to reduce operating costs.

Though the concept is not new, as the email option already exists for investors, the Bharti Axa fund is unique in that it will pay back its investors from what it saves by cutting down on expenses arising from physical delivery of statements.

“We are promoting online servicing of clients through this model. It is the power of compounding that will add up returns for the investors in the long term. We are also in talks with large distributors and banks to market this plan,” said Vikas M Sachdeva, country head (business development), Bharti Axa Mutual Fund.

However, an industry official disagreed, saying, “It is nothing but cost-cutting. There is a challenge in terms of mailing cost. It takes Rs 8 to deliver a couriered statement to the investor. So the fund is basically trying to make the scheme attractive by these perks. The reality is that in India, customers still want to see statements in the paper form. Less than 8 per cent of our investors today opt for the email option.”

At present, mutual funds charge at least 1 per cent as management charges, which is one of the streams of revenue for fund houses. But under this plan, while Bharti Axa Mutual Fund will save on mailing expenses, it will have to bear a part of the management charges, which is being offered to investors as monetary compensation.

The reduction in management charges will also be reflected in the net asset value (NAV). If for a normal investor, the NAV is Rs 10, the NAV for an investor opting for the plan will be Rs 10.025.

In a scenario of extreme pessimism surrounding the stock markets, one set of investors have kept faith: domestic institutional investors or DIIs. While sensex has lost 6,000 points from the beginning of this year prompting retail (small) investors to follow foreign institutional investors (FIIs)— who have been in a sell-mode all through out—DIIs have provided the much needed support to the markets. This is why their conviction, as evident from their continuous buying, in domestic equities stand out—even as every other influential investor segment has lost hope in stocks this year.

Consisting of banks, financial institutions, insurance companies and mutual funds, DIIs have net investments to the tune of Rs 48,179 crore till August this year, cumulative data for both Bombay Stock Exchange and National Stock Exchange show. FIIs are the biggest category of net sellers, offloading shares amounting to Rs 69,925 crore in the same period.

The investments put in by DIIs indicate the continuous inflow of funds through unit-Linked plans (ULIPs), insurance policies and mutual fund schemes may have been
continuously deployed in the markets.

There are over 500 equitylinked mutual fund schemes and significant number of insurance schemes that invest in stocks. But as the selling prowess of FIIs became pronounced accompanied by selling from retail investors also, DIIs have not been able to match them by stepping up their investments. On an average, DIIs have been net buyers of Rs 6,000 crore per month (January-August) while the market makers called FIIs have been net sellers of over Rs 8,500 crore per month in the same period.

After following FIIs for a substantial portion of the correction, retail investors have turned net buyers from June onwards. However, the sheer lack of strong buying support has not helped the cause for equities. Non-resident Indians, a much smaller investor segment, have also remained net sellers of stocks to the tune of Rs 57 cr for the first eight months of the year.