FOR WHOM THE BELLS TOLL...
The regulator seems to be on a single minded mission to pull the shutters on the mutual fund industry, in its zeal to make things easier for the investor. Now, with no margins left to pay the seller, mutual funds will remain an anglicised urban product. Insurance (thanks to the timely action by IRDA) will be the product that will continue to be sold across the length and breadth of the country. Insurance industry will regain its place under the sun. In its battle with the mutual fund industry for a share of the wallet of the public, it found a great ally in the government of India.
The mutual fund industry, alas, missed its first decade by total dependence on the distributor fraternity and instead focusing on the AUM rat race. Of course, AMFI was effectively used to push through regulations that helped protect the big boys.
Most of the mutual fund sponsors also own insurance companies. This prevented the mutual fund industry from actively taking on the insurance industry. The sponsor was threatened when SEBI tried to put brakes on the ULIP sales. Fortunately, IRDA had enough clout with the government to ensure legislative protection and sanctity to push ULIP’s to people at large.
Some cosmetic changes will be made in the ULIP’s, but it is unlikely that the insurance industry will scale down the commissions significantly. The investor will continue to get opportunities to invest in ULIP’s as before. Most Advisors, who were selling both mutual funds and insurance, will focus only on insurance products. Those were not selling insurance before, will invent reasons to structure life savings around insurance.
The clout of the insurance industry can be seen in the fact that LIC has been permitted to issue bonds that would qualify as “Infrastructure Bonds”! Maybe it will also get extended to other private insurers. Why not? If you look at the fact that in 2009-10, ULIP collections amounted to over one lakh crore rupees, the insurance industry is extremely important to keep the financial markets going. The investors in insurance paying a little more commissions do not matter in the importance of things. Millions of insurance agents would not be able to feed their families if the government had not passed the legislation that kept SEBI away from the insurance companies. So, let us not complain about insurance being an inefficient way to invest. As opposed to it, the mutual fund industry collected less than ten thousand crore rupees in 2009-10.
It is the insurance industry that helps bail out stock markets and the governments use it to bail out PSU issues of stocks and debts. The mutual fund industry does not help out the government in times of need. Naturally, it is the insurance industry that needs to be given full protection as it is an important building block in the nation’s finances.
Now, AMFI is apparently getting rebirth as a Self Regulatory Organisation (SRO). Many years ago, this proposal was roundly put to bed by its members. Now, the players have no option but to seize this opportunity and use it to protect the industry. One hopes that it does not succumb to ridiculous proposals like insisting on minimum capital etc. I hope that the smaller mutual funds get to have their say in the new avatar of AMFI. Maybe we will see a change in the board composition, which has been dominated by a few large players on the basis that since they represent a larger AUM base, they represent more investors! I have never seen AMFI being anything other than a trade lobby, so the platform was more used to create entry barriers and nuisance to smaller players.
In this whole context, what about the investor? Well, who gives them a damn! They can buy what their friendly broker tells them. SEBI will try and make mutual funds more and more attractive for them, but will put it out of their reach as mutual funds will no longer be able to spend big money in reaching out to them. If I take the cost of servicing a SIP investor of one thousand rupees a month, the costs far outweigh the money that can be made out of them. The small investor is a drain on the mutual fund industry. Even in the days of entry loads, upfront commissions etc, the focus was on large ticket investors. Now, surely the fund houses have strong financial reasons to ensure that the small investor is kept away from their books.
Of course, for the small investor, the other door of insurance is open. It is being made more transparent and ‘better’. Instead of debiting the first year commission in one go, they will spread it over the ‘life’ of the instrument. And you had to save through ULIP’s only for three years as the minimum. Now it is five years.
Investor protection, RIP.