After the capital market regulator’s decision to abolish entry load for mutual fund schemes, it’s now time for the insurance regulator to usher in reforms, says Monika Halan.

There shall be no entry load for the schemes, existing or new, of a mutual fund. The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/mutual funds which they are distributing or advising the investors (on).”

The short 55-word decision from the capital market regulator, the Securities and Exchange Board of India (Sebi), that abolished the upfront agent commission (currently you pay up to Rs2.25 on every Rs100 invested in a mutual fund) has created havoc in the market. Breast beating or the clink of bubbly glasses depends on who you are—a mutual fund or an insurance agent

Commission bearing financial products, such as mutual fund schemes and insurance policies, run the risk of misselling by vendors who push products that maximise their incomes, rather than client welfare.

By taking away the incentive to push the fund that gives the most commission, Sebi’s decision will nudge the market to eventually split into chemists and doctors. The chemist will simply vend mutual fund schemes and offer no opinion on what you should buy. You will probably come to him for ease of transaction and for that, not unlike the payment to your stock broker, you will pay anything between 20 paise and 40 paise on every Rs100 of transaction

Undiverted by the din of the new fund offer sales spiel that threw money at distributors to sell their new fund offers (there are stories of large distribution houses not even taking calls from new fund houses unless a 4% commission was on the table), you will now look very carefully at past performance, track records and annual fund management fees before you buy

And no, you will not cut a cheque for 20 bucks each month you buy, as some fear, you will probably pay for this through an annual cheque for the service or an on-line payas-you-go system, not unlike the stock broking model that you are used to

What if you don’t want to do the homework and would rather have advice from a professional? To get this, you will not go to a chemist (like you do currently) but to an entity that has the ability to offer financial advice. Which means, the adviser has a set of attributes in terms of a basic level of education and certification and is in a regulatory framework that allows you to trust his credentials. For this, you must be willing to pay an annual fee to the financial adviser, who may also vend the products himself or have tieups with pure vendors.

The adviser will be a tracked entity with a paper trail on the advice he gives, and will not be able to suggest a unit-linked insurance policy to a person seeking a pension product and get away with it.

He will run the risk of his livelihood—his licence— being cancelled
With this 55-word decision, we are closer to this superior way of managing the retail flow of money into the markets

A key reason that India remains stuck at low levels of household participation in financial instruments and invests still in low real return bank deposits, is the lack of trust in the product vendor – and rightly so
You make smart choices—if you can’t trust the guy selling, you simply don’t buy the product.

For this market to work, there is yet a couple of missing links. The separation of advice from vending or of a doctor from a chemist is yet to happen. Given the fact that any product bearing a load (cost or commission) has advice embedded in it, the surgery to separate the two must happen. Sebi has done it

But one part of the market is so much in the dark ages that unless the winds of reform blow in Hyderabad (where the insurance regulator resides), you will continue to be mis-sold products and the retail market will remain small, under-developed and inefficient. The insurance regulator, compared with its capital market counterpart, is still grappling with the past. Not only are commissions embedded in the product, but are actually pushed together and collected from you in the first three years, on a product that is supposed to live for at least 15

Some of these agent com- missions are hidden away in a head called “administrative costs” that you don’t even see

So, you pay for the joy of buying a 15-year product (that you may be encouraged to churn after three years) and pay up to Rs40 on Rs100 invested, (remember we are now talking of 20-40 paise in funds for the same investment!) and worse, you continue to pay the agent a commission over the life of the product that is unlinked to the service you get. In the new post-Sebi no-load decision that is asking you to evaluate the service and pay for it, the contrast seems even starker

Where we go from here will depend on what the insurance regulator does now. The need is for drastic reform and to separate advice from product vending, and of course, to not fall back on either the limitations of Insurance Act or the global precedents of the life insurance industry

And also throw out the glib story that some smart insurance chief executive officer gave it eight years ago that the industry needs leg room to innovate hence the non-standardization of costs, lack of benchmarks and lack of control of the customer to evaluate and pay for the service of the agent
If freedom was what it took, then surely after more than 50 years of insurance vending in the country, penetration would be higher than the current under 5%. The move is now from Hyderabad and the Indian retail investor is hoping that it plays ball

U K Sinha, CMD, UTI Asset Management Company, feels the rules need to change vis-à-vis the insurance industry.

There is a regulatory bias against the MF industry vis-à-vis its closest competitor — the insurance sector. While regulations are becoming far more strict for MFs, they are far more liberal in case of the insurance sector. MFs are mandated to comply with the knowyour-customer (KYC) norms, PAN requirements and are even subject to annual information return (AIR) disclosures in the tax returns.

However, no such regulations have been mandated for the insurance sector. Besides, in contrast to the MF industry where not only the distribution but also the management charges are capped by the regulator, the insurance industry has a far more liberal regime for charges, allowing it aggressively market its products and have a better distribution network.

Sebi, for instance, doesn’t allow mutual funds to advertise in the media with celebrities. The insurance industry doesn’t have a similar restriction.

Credit risks have increased manifold in the debt market on account of the financial crisis. Many Indian companies have overstretched themselves and they may now have to resort to high leverage to fund expansions and acquisitions.

In an interview to Vikas Srivastav, Bajaj Allianz Life Insurance chief investment officer Sashi Krishnan says as a debt investor, his company will now exercise extreme caution in the credit market.

Excerpts: ¦ In the light of the Satyam fiasco, how do you expect the market to react over the next few quarters?

Market sentiment will take a big hit on account of the fraud. More importantly, this incident raises questions on the level and efficacy of corporate governance in India, specifically the technology sector. Another issue that now comes to the forefront is the role of independent directors on the boards of Indian companies. A lot is going to be written on the Satyam saga over the next few days and months, but one thing is certain — the markets will not forget this very soon.

Equity markets are jittery also on account of expecta tions of weak GDP growth. While there is little doubt that we will not be able to avoid a slowdown, India will definitely recover ahead of the rest of the world because of a couple of reasons. Our growth is largely a function of domestic consumption, which still remains intact.

Domestic consumption will get a further boost after the interest rate cuts and injection of fresh liquidity into the system. Large spending on the infrastructure front will also cushion the fall in growth.

Mutual fund and insurance companies are investing big money in the debt market. Do you see safe and steady return from the debt market?

Credit risks in the debt market have increased manifold on account of the financial crisis. Many Indian corporates have overstretched themselves and they may now have to resort to high leverage to fund their expansions and acquisitions. As debt investors, we would exercise extreme caution on the credit front. As regards risks, interest rates have fallen significantly, causing yields to fall. This has led existing debt fund investors to see an appreciation in their portfolios. Given that the monetary policy is now biased towards a further drop in interest rates, we can expect yields to soften further. We manage our debt funds with a credit view that is biased towards the ultra conservative and we manage our debt fund portfolio durations after taking an active view on interest rates. 

Banks in India are now increasingly focussing on HNI wealth management. Is Bajaj Allianz also focussing more on HNI wealth?

We strongly believe that we need to be with an investor through his life cycle. With this in mind, we offer products that suit various needs within a life cycle and funds that cater to all kinds of requirements for asset allocation. Asset allocation is the primary determinant of risk and return in a portfolio. Portfolio returns are not determined by market timing or security selection, but by asset allocation decisions. Realising the importance of this, we now offer all our retail and HNI investors an Asset Allocation Fund and a Wheel of Life portfolio strategy. Small investors and HNIs then benefit from strategies that take advantage of movement of asset prices, resulting from changing financial and economic conditions. In the Wheel of Life portfolio strategy, assets of every individual policy holder is reallocated among equity, debt and cash assets in a proportion based on the individual’s outstanding years to maturity and the policy term chosen. This ensures that the level of risk that an individual is exposed to is optimised and his return maximised. ¦ How have your funds performed last year? Our cash, debt, equity and asset allocation funds have outperformed the benchmarks and have delivered superior performance for our investors.

Your advice to investors for this year?

Long-term investors need to keep a few simple mantras in mind. First, invest for a long haul. An investor who is patient and remains invested over a long period of time will reap the benefits by earning significantly better returns. This will ensure that the power of compounding will help you build your wealth. And last but not the least, start investing early.

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

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.

The area under consideration today is availability of insurance along with mutual funds; and this is likely to remain in the spotlight because of huge attention focused on the area. An investor needs to distinguish the position with respect to other mutual funds that he has experienced. In this entire issue, the question of collection of insurance premium is important and a small distinction can make all the difference.

Regulation In the existing position the mutual funds cannot collect insurance premium. This, according to many people, puts mutual funds at a disadvantage because unit linked insurance plans (ULIP) offer insurance as well as investment like mutual funds together.

There are schemes that still offer an insurance cover but comply with the main guideline. To understand this one has to look at the fine print of the entire issue.

Offering insurance Presently when a mutual fund offers insurance along with the investment in their specific schemes, the entire situation works in a different way Mutual funds that offer such insurance do not ask the investor to pay the premium.

This means that the funds are offering insurance but are not collecting premium and the later condition is the one that has to be complied with. Currently the funds enter into a tie up with the insurance companies to provide insurance and they pay the cost. This is not collected from the customer. This thus becomes affordable only for those funds that have a strong financial position and this is also the reason why such insurance is offered for specific types of investment.

Collecting premium This can be distinguished from the situation where a mutual fund house collects insurance premium from an individual. This is what has been demanded from several quarters to get the mutual funds back on a level playing field with other instruments in the market.

Once the fund houses start collecting premium, they are effectively giving both the benefits of insurance and investment at a single place and the character of the investment changes. Investors need to look at the fine print because it is this kind of small change that can lead to a different outcome. They need to understand what is happening and how they are getting affected in terms of the benefits received.

PREMIUM DIFFERENCE ¦ Insurance and investments are very popular offer ings in the market ¦ There is a demand for mutual funds to provide insur ance ¦ Currently mutual funds cannot col lect insurance pre mium ¦ So mutual funds offer free insurance to some investors ¦ This is different from a state where they offer insurance too and collect premium for the insurance

Cross posted on Personal Finance Blog and Insurance Blog

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

Nine months ago I did not know what a blog is? Stuck up at home due to a back injury, I was casually chatting up with a geeky friend asking him about how to create a website, purely in jest. “Why don’t you begin with a blog and then see if you can make it bigger”, he said and gave me a link of Blogger.

300 posts later, the dream of translating it into a website seems plausible. Just take a look at what I’ve created without knowing html code! (Well, I can figure out the a href link code, but just!!) Now you know why there’s no post here. I have exported these posts to my website blog

RSS readers are requested to take this feed please: http://feeds.feedburner.com/personalfinanceforeveryone

Personal Finance 2.01: It’s a one stop personal finance website and I urge you to take a test drive. Feedback will be of immense help.

Discussion Forum: It’s a forum where you can discuss all your doubts and questions about personal finance, planning and various products like insurance, stocks, mutual funds, etc.

PF 2.01 Blog: I have started a blog focussed on personal finance and I would invite you to share your thoughts. Let’s have a real conversation of PF going on here.

Weblinks: I am regularly out on the web. When I find a great site I list it here for you to enjoy. From the list choose one of my weblink topics, then select a URL to visit.

NewsFeeds: We have some great news feeds to take a look at. Suggestions are welcome.

Financial Advisors Directory: We invite professional and net savvy advisors to register and provide the information needs. This one is a first in India to the best of my knowledge.

The design stage will take another two months after which I’ll be ready to go live. The real action begins only after then. Wish me luck.

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

Hey, I’m not into fashion designing. But could not resist a tantalising title to talk about Insurance!! If you haven’t started a family, an Insurance cover is the least of your priorities. But even though it’s not that cool to be insured, it sure is smart when there are people who depend on you.

Life insurance is a potent tool that not only offers the ability to plan for unforseen events that can affect the family’s financial situation adversely, but is also looked up to as an important tax saving cum investment tool.

One needs to do a certain amount of spade work before purchasing a policy, to ensure the best possible coverage at the right price. Here are some helpful tips to get you started:

Explore As premiums vary widely from company to company and cover to cover, it’s important to look around. One can try internet sites to get instant quotes.

Plot your value The key to purchasing the right amount of life insurance is to have just enough coverage to meet your needs. If you have more life insurance than you need, you’ll be paying unnecessarily for higher premiums. On the other hand, it’s important not to have too little coverage, resulting in you being underinsured.

Health matters the most Healthy people get better rates on life insurance. Higher premiums are quoted for anything that poses a risk for longer life expectancy (smoking, on regular medication, etc). Sooner the better As premium rise with increasing age, the younger you are when you purchase life insurance, the lower premiums you will be required to pay.

Review your cover periodically Any life change indicates the need for an overall review of the financial plans. Make sure you have enough cover for all important events of life.

Focus on annual installments You may not realize it, but you may be paying more for your life insurance if you pay your premium in monthly installments. Many insurance companies charge extra fees if you make monthly premium payments instead of paying the annual premium.

Never conceal facts Though, age and negative health related conditions attract higher premium, don’t think about lying on the insurance application. If your insurance company gets the knowledge of concealed facts they can terminate the cover.