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Sebi moves to protect MF investors’ money
On 29 March, the Securities and Exchange Board of India (Sebi) sent an email to mutual fund (MF) houses that they can’t dip into their scheme’s pockets to pay upfront commissions to agents.
Dipping into savings: MFs pay a combination of upfront fees and trail (loyalty) fees to agents. While upfront fee is paid when the agent gets fresh subscriptions, trail fee is paid based on the time the clients stay invested in the fund. Ever since Sebi banned entry loads (charges up to 2.25% imposed at the time of investing, which eventually used to get passed on to agents as their commission), fund houses appear to have been dipping into their reserves to pay upfront commissions.
Before Sebi banned entry loads on direct applications in January 2008, investors used to pay 2.25% entry loads to fund houses. Since fund houses did not pay the agents for such applications, this amount was accumulated in the scheme’s profit and loss account. Further, though entry loads on direct applications were abolished in January 2008, they used to save money from the scheme that would have otherwise been paid to agents as trail commission. Additionally, equity funds charge up to 2.5% expenses to the scheme every year as annual expenses, out of which they meet their administration and office costs, besides their marketing and selling expenses. Any savings here, too, got accumulated in the scheme’s account.
Putting a stop: Ever since Sebi abolished entry loads in August 2009, fund houses have come up with ways to compensate the agents. One way was to dip into the scheme’s reserves out of the money accumulated or saved in the past, to pay distributors.
With the latest directive, Sebi has reiterated that the burden of upfront commissions should not be passed on to the investor. “The spirit behind scrapping entry loads is that investors should get the benefit of lower costs. Else, if loads are paid out from the scheme’s reserves, the purpose behind the regulation is defeated," says Rajesh Krishnamoorthy, managing director, iFast Financial India Pvt. Ltd.
--Kayezad E. Adajania
‘Ulips more popular in Tier II, Tier III cities’
Fiscal year 2010-11 will see the continuation of two broad trends in the life insurance space: changing distribution strategy and guaranteed products. The global financial crisis exposed the hit-and-run sales practices of the industry that focused on getting more first-year policyholders than continuity. Says Anand Pejawar, executive director, marketing, SBI Life Insurance Co. Ltd: “The focus initially was to grab a larger market pie—in this case, the first-year premium. Mis-selling was rampant. Now the industry has woken up to the fact that continuous flow of premiums is important."
The stock market crash brought home the risks of unit-linked insurance plans (Ulips) and lapsation rates zoomed. Adds Pejawar: “The rate of lapsation increased in 2008 and 2009 because of the slowdown. Investors who were ill-informed and had invested mainly due to the prior market boom skipped premiums during the crash."
To address these issues, 2009 saw a spurt of guaranteed products in the Ulip space. Guarantees, ranging from maturity bonuses to capital protection, became the flavour of the year.
A recent survey conducted by Boston Analytics, a financial research firm, has confirmed this trend. According to the Monthly Indian Consumer’s Savings and Investment Behaviour Report, there has been a marked rise in investments in Ulips in smaller cities. But the preference for Ulips has remained almost the same in metros and tier I cities over the past seven months, says the study.
The report surveyed about 10,000 people across 15 cities and towns. “Among those insured, about 80% of consumers surveyed in tier II cities and 75% in tier III cities had invested in at least one Ulip in the past year. Compared with this, just 61% of consumers in metros and tier I cities invested in Ulips in the previous year," says the report.
Says Debopam Chaudhuri, economist, Boston Analytics: “Ulips that offer guarantees are becoming popular with tier II and tier III cities because they dabble in equities and, at the same time, offer some capital protection by way of guarantees."
-- Deepti Bhaskaran
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