Skip to main content

Invest in SIPs and not in Endowment Plans

Most of you who read this column are now investing in the right way, using a systematic investment plan (SIP). But did you know that your dull, boring SIP is the result of more than 10 years of regulatory change? Most of you have also discarded the low-return endowment plans and now purchase a pure term plan to look after your life insurance needs. But did you know that you got to the right solution not because of regulatory change but despite it. I've been mapping the Indian personal finance industry for over 15 years and the behaviour of two regulators in industries that both manage household money has been fascinating. We now have the data to show the impact of regulatory change in the mutual fund and the life insurance industries on firms, sellers and households. I will relate the story through four tables.

Mutual funds have gone through a decade of regulatory action on costs and where they are placed. I find that the mutual fund industry made and sold products with the highest costs. Table 1 shows how the industry kept moving to launch fund types that allowed them to charge more from investors. Till 2006-07 all mutual funds could charge 6% of a new fund collection to investors which lead to churning of investor money. Mutual funds would go on launching new schemes, drum up a lot of advertising to get investor interest, pay distributors large commissions and get investors to buy. Nothing wrong with that except, in a few months, another new fund offer would do the same and agents would 'churn' investors from the old to the new scheme with a view to harvest the commissions.


The Securities and Exchange Board of India (Sebi) banned the 6% NFO charges on open-ended funds initially. The industry began launching closed-end funds because they chould still charge the 6% on those funds. Sebi plugged that gap. But then the industry began to harvest the 2.25% front load (commission embedded in the price of the scheme) in the product. In 2009, Sebi banned upfront commissions totally. Mutual funds became a no-load product and sellers could now either get a trail commission or charge a fee. Mutual funds (some of them, not all) found a way out to compensate agents. They began launching series of closed-end funds and 'upfronted' the trail commissions for the next three or five years. The data shows the numbers of closed-end funds jumping clearly. By 2015, the 'upfronting' was capped at 1% of the investment. As a persistent regulator kept closing gaps, the industry began an extensive outreach and literacy programme, telling investors to use a systematic way to access equity markets. Table 2 shows the almost vertical rise in investor interest that looks unlinked to the state of the stock market, post the clean-up in the mutual fund industry. The SIP flows at over Rs 4,000 crore a month by May 2017 show that this is sensible stock-market investing. Note that net assets turn positive and then are rising post-2014. This means that retail investors are holding their equity funds for a longer period of time, or that churning is less than before. Data is showing that both industry and investors have done well as the regulator has set sensible rules of the game.




















The life insurance industry saw a disruptive change in 2010 when the regulator introduced arbitrage within the industry. In 2010, the ministry of finance leaned on the insurance regulator to check the rampant mis-selling of unit-linked insurance plans (Ulips). Used to the guaranteed returns of traditional plans, investors were hit by a new product called Ulip that agents said would double their money in three years. The rising markets made the deal look good. Stories of sharp sales, fraud and fudged signatures on policy documents reached the ministry of finance, which then asked the regulator to clean up. The regulator did clean up, but just the Ulip product, leaving the traditional plan to continue with its high-cost and opaque product structure. Table 3 shows how the industry flipped the sales from Ulips to traditional insurance policies. The argument that investors burnt their hands in the market and therefore demanded traditional plans flies in the face of the insurance industry argument that very high upfront incentives are needed to sell life products because insurance is sold and not bought.


Did the regulatory change benefit investors? No, it did not, because the reform nudged the industry to move from a now transparent, lower cost and potentially higher return (Ulip) product to an opaque, higher-cost and poor return (traditional) one. One way to map investor behaviour in a long-term product is to look at persistency, or the number of policies that are funded in subsequent years. If a person is right-sold a push product, then she clearly knows that she needs to fund it for 15 to 20 years. Why would a person who is buying a long term product stop funding it after the first few premiums? You can argue that a few people may do this due to some circumstances, but for more than half the policies sold to die after the 5th year points to mis-selling. In the case of certain companies, more than 80% of the policies sold don't survive five years. Did the persistency numbers improve post the 2010 regulatory change? Table 4 compares persistency numbers before and after the 2010 regulation change. The data clearly shows that persistency has fallen post the switch from Ulips to traditional plans after the 2010 regulatory change. I've chosen the firms that represent more than 90% of the market. Investors are being sold insurance due to the high (and increasing) incentives allowed by the regulator, but the industry is a leaking bucket - it is unable to retain money even for five years. This is not good for investors because they get very little of their money back if they exit traditional plans within the first few years.




Clearly regulatory change impacts firm and investor behaviour. There is now evidence to show that the capital market regulator reform has given us a better market but insurance regulator has caused more harm than good to retail investors in India.


For further information contact SaveTaxGetRich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

OR

Call us on 94 8300 8300

 

Popular posts from this blog

Save Tax With Mutual Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300       Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year. Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes ·        Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years. ·        First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes un...

Buying a Used Car

Invest in Mutual Funds Online Download Mutual Fund Application Forms   Pre-owned car can make sense in these inflationary times. But buying one can be trickier than getting a new vehicle    If you are thinking of buying a car but are worried about the rising inflation and higher EMIs eating into your budget, you should consider buying a used car. For those learning to drive, the general advice is that they should hone their driving skills in a used car. However, buying a used car is not an easy task. Though a used car costs less, there are a lot of aspects to be considered while buying one. You should do your due diligence before buying such a car. For example, two cars of the same model would carry two different prices. The difference in price could be on account of the age of the car, how many people have driven, etc. First Fix Your Budget Since used cars are available in a wide variety of models and prices, the starting point would be to determine your budget befor...

How much to invest in gold ?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) Let your motivation dictate the share of the yellow metal in your portfolio Enough has been said and written about gold as an investment option. The latest argument is that the craze for gold among Indian households is endangering our country's balance of payments. The policymakers are busy trying to find ways of discouraging investment in gold, but if households keep the common good in mind, they would be paying the market price for gas cylinders as they do for, say, their mobile phone bills. After all, private decisions are driven by private motives. So, how should a household look at gold from its own perspective? Gold is primarily acquired for its merit as a store of value. Even if the worst crisis hits a family, the gold that it holds could be put to use anywhere in th...

Debt Mutual Funds Best Fixed Income Investments

Debt Mutual Funds - Invest Online     In the last one year, except for a select few sectoral funds and small cap funds, not many of the equity funds have given great returns. On the other hand, debt funds have done relatively well in terms of returns. So far in the new year too, the stock market has been extremely volatile, pushing investors to look for safer havens. In this context, debt funds are looking safer bets for those investors who do not have the appetite for higher level of volatility. Investors who look for a regular income stream, also look at fixed income products like debt funds, bank fixed deposits and post office monthly income schemes.  Among the fixed income products, debt funds score over others because of chances of higher return, has nearly similar level of risks and liquidity. According to Shah, people looking for regular income could opt for a systematic withdrawal plan (SWP) in debt funds , which, if done judi ciously could also save on taxes. Shah explaine...

LIC's JEEVAN SHIKHAR

  LIC's Jeevan Shikhar is a participating, non-linked, saving cum protection single premium plan wherein the risk cover is ten times of Tabular Single Premium. The proposer will have an option to choose the Maturity Sum Assured. The premium payable shall depend on the chosen amount of Maturity Sum Assured and age at entry of the life assured. This plan also takes care of liquidity need through its loan facility. The plan will be open for sale for a maximum period of 120 days from the date of launch. 1.   BENEFITS   : a) Death Benefit: On death during first five policy years: Before the date of commencement of risk   :   Refund of Single Premium without interest. Single Premium mentioned above shall not include any extra amount if charged under the policy due to underwriting decision and taxes. After the date of commencement of risk   : "Sum Assured on Death" equal to 10 times the tabular single premium shall be payable. On death after completion of five policy years but b...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now