We often have problems with our insurance agent. Thank goodness we can change the agent if we are unhappy with his services. Many of us also have problems with our mutual fund agent — the dealer or distributor who mis-sold a fund. Can you change your fund agent without surrendering the policy you bought through him? Yes and no. Yes if your agent is small (mostly individuals), no if he is big (mostly institutions). This is unfair to small agents, disservice to investors and anti-competitive for the mutual fund industry.
On its part, the Association of Mutual Funds in India (Amfi) is encouraging the move to allow fund investors to change agents by just informing the fund house. But the fund houses are not particularly enthusiastic.
That’s because the industry depends heavily on the distributor and agent network. Funds continue to ask investors to get no objection certificates (NoCs) from the existing dealer or agent before agreeing to a transfer. This is like asking an agent to gift his client to his competitor. Not surprisingly, agents are unwilling to give customers the NoCs, since they will lose out on the trail commission that’s paid to them as long as a customer remains invested. Apart from this commission, which can go up to 0.5% of the existing investment, the agent also makes a commission on new funds sold. This commission generally comes out of the 2.25% that’s charged as entry load.
Now, in a bid to divert attention from the lack of service, some agents and distributors started offering gifts and incentives to woo investors away from other distributors and agents. The only way a fund house can maintain any control is to insist on the NoC. They are also using discretionary methods to force small agents to follow the practice of transferring fund holders, which means the new agent earns the trail money.
However, large distributors like banks and brokers are not similarly forced. The trail commission for such large organisations can run into several crores of rupees, so the loss of groups of customers can have a definite impact on the bottomline.
What this means is that investors have an exit option only if they are with small agents. Large distributors, particularly those with a significant online presence, say that since you signed a power of attorney authorising them to buy and sell on your behalf, if you move out, you will have to sell your units. And if you sell and then buy again, you will be paying the entry load again, leading to more commissions for the new agent.
All of this ultimately spells bad news for investors, who are stuck between different agents and distributors, and can expect no help from the fund house. The main reason for this is that the Amfi suggestion was not a guideline or stricture. The way out is for the Securities and Exchange Board of India (Sebi) to issue a directive forcing all fund houses to allow transfers. This is something Sebi is working on, and this could be implemented in the new year. Until then, the small fish is taken to task, while the big fish make merry.
By Narayan Krishnamurthy
PAYING FOR INEFFICIENCY | |
| Difference between lending rates and deposits, or the intermediation cost, in 2007 | |
| India | 5.1 |
| Thailand | 4.0 |
| China | 3.4 |
| US | 2.9 |
| Singapore | 2.4 |
| Source: Economist Intelligence Unit, RBI, McKinsey | |
That India is no longer a debt-averse society is hardly breaking news. A recent McKinsey study shows that loans have grown at over 30% in the past three years. But the fact that we are becoming aggressive borrowers becomes more impressive when we consider that the cost of borrowing, or intermediation cost, is higher in India than in most other countries in the region.
The average lending rate in India in 2006-7 was about 13% and the deposit rate was close to 8%, which means that the rate at which we borrow is 5% higher than the interest rate banks pay you on your savings. This is double the intermediation cost in Singapore. The main reason for this is low overall efficiency and the regulatory costs involved. Banks need to keep a minimum statutory liquidity requirement of 25% and maintain lending to the priority sector at 40% of total lending.
A large portion of funds are thus invested in low-yielding assets and this pushes up intermediation costs.
By Sushmita Choudhury
Insurance products have long been criticised for offering no flexibility to policyholders seeking an exit. Take the case of a unit-linked insurance plan. Policyholders had to mandatorily pay the premium for three years or wait for the policy to attain paid-up value, and this made the products all the more confusing for lay persons.
Insurers are now promising policyholders an easy exit option. In some cases, they are offering a full refund, while other policies are offering to repay most of what the policyholders paid. Until now, surrenders were only allowed in special cases on humanitarian grounds, like with annuity products.
There is also a need for transparency and clarity in agent dealings, an area which triggers most complaints of mis-selling of policies. To this end, the Insurance Regulatory Authority of India (Irda) has proposed a system under which insurance companies must list out, in writing, the benefits and consequences of non-payment and in case the insured person’s financial position changes.
The latest move to allow an easy exit option only reinforces Irda’s stand on policyholder protection. Now you can return unwanted policies stating the reasons for your objection and be entitled to a refund of the premium paid, subject only to a deduction of a proportionate risk premium for the period on cover, stamp duty charges and the expenses incurred by the insurer on your medical examination.
This is definitely a move forward for scores of policyholders who have long been saddled with insurance policies they don’t want or need.
By Narayan Krishnamurthy
The multi-commodity exchange will soon introduce futures trading in gold coins, which will enable retail investors to buy or sell gold coins at market determined rates. This move will bring some order into the unorganised gold market, where a significant difference exists between the price of physical gold and gold coins due to the high premiums charged and discounts given.
The futures contract will also allow more participants in the gold coins market and offer retail investors an alternative avenue for investments beyond the not-so-popular gold traded funds. And with the settlement of futures contracts being facilitated through the clearing corporation, there will be safety and transparency in gold coins trading.
By Sameer Bhardwaj
Is your vehicle guzzling more of your salary than you are happy with? It might be time to shift to cheaper, alternate fuel. Think CNG or LPG. New research shows that the market for alternate fuel drives in India earned revenues of over $82 million in 2006 and is expected to reach $473.4 million by 2012.
According to Frost and Sullivan, a global consulting firm, this market is expected to grow at a faster pace than the regular vehicles market in India. In keeping with this expected demand, most key vehicle manufacturers are looking at launching alternative fuel vehicles in the near future.
Furthermore, with petrol prices continuing to rise, many car owners are also looking at converting their vehicles to run on CNG/LPG. Fuel conversion ensures at least 40% reduction in fuel spending, say service station managers.
By Sushmita Choudhury
The investment and insurance combination that insurance companies offer through unit-linked plans (Ulips) has proved very successful. Now, Kotak Mutual Fund has decided to enter this arena with a new package deal—Kotak Star Kid.
| AT A GLANCE | |
| Minimum SIP: Rs 1,000 | |
| Maximum sum assured: Rs 1 crore | |
| Medical test threshold: Cover above Rs 10 lakh | |
| Maximum tenure of SIP: 20 years | |
| Available with: Kotak 30 and/or Kotak Tax Saver |
The new scheme allows you to invest through a systematic investment plan (SIP) over a period of 5, 10, 15 or 20 years in either Kotak 30 or Kotak Tax Saver scheme. At any point of time, the cumulative unpaid SIPs after one year are insured. Say an individual chooses the SIP option of 15 years and invests Rs 5,000 every month over this period. After paying the first 12 SIPs, if the individual dies, then the value of the remaining SIPs would be handed over to the nominee, which works to Rs 8.4 lakh in this case.
The insurance comes with an extra cost, which is added from the higher entry load of 3.25% of the amount invested against the 2.25% that is applicable otherwise. The product looks very attractive for individuals who have a financial goal they are working towards. And you pay a very small risk premium for the insurance you get. Such a model can work well if other fund houses follow suit. Unlike Ulips, where you can only hope that the fund will do well, here one can avail of insurance on a well performing mutual fund.
By Narayan Krishnamurthy
“We maintain our positive view on the Indian market and recommend buying at every correction”
— Amitabh Chakraborty, president-equity, Religare Securities
“We are considering making certain changes in the insurance regulations to give more flexibility to insurers without taking recourse to legislative amendment”
— CL Muralidharan, member, Irda, mulling new instruments for insurers (Source: Business Standard)
“I don’t think it makes much sense spending too much energy on ‘new highs’ and ‘new lows’ as tops and bottoms are for fools”
— Raamdeo Agrawal, director and co-founder, Motilal Oswal Financial Services (Source: Economic Times)
“If retail has to benefit, make 10% discount compulsory for all IPOs”
— Prithvi Haldea, CMD, Prime Database (Source: Economic Times)
Some figures that have immediate or long-term personal finance implications.
Rs 50,200 is the amount of average fresh investments made by mutual fund retail investors in India in the past one year.
20 houses are built every hour by real estate giant DLF alone. Yet there is a shortage of over two crore housing units in India.
19 is the number of ATMs per thousand people in India. This compares poorly with other countries. For instance, there are 51 ATMs per thousand people in China, 193 in Brazil and 246 in Mexico.
