You know the story of the frog prince? The guy who became a frog after being cursed and needed the kiss of a princess to revert to human shape? Unit-linked insurance plans (Ulips) are like that.
They collect money from the public, they invest it in the capital market, they provide returns at net asset value (NAV), but by adding a little bit of insurance, projecting returns at 7% or 14%, having celebrities endorsing them and putting a huge price tag (load), they want us to believe that these are insurance schemes.
The price tag is what makes them exceedingly popular and has led to some interesting sales innovations, which I will not enumerate here. It is sufficient to say the term mis-selling hardly covers it all.
A few mutual fund (MF) distributors have practically stopped offering MFs except when faced with a savvy and determined investor. Many who are more conscientious (and contrary to popular opinion, there are a lot of them out there) find it difficult to make ends meet if they sell only MFs.
The MF industry has been shrinking, while Ulips have been growing like weeds.
The reason is not hard to see. Why do engineers from the Indian Institutes of Technology do their master’s in business administration and become fund managers? Why do doctors appear for the Indian Administrative Service exam? Why does the average Indian leave the comfort of home and migrate to Mumbai and live in a slum? The answer to all these questions is simple: more money and herein lies what I call the Pepsi-water paradox. In the smallest of villages you can get Pepsi, but very little clean tap water because there is no economic interest in delivering clean tap water.
(Pepsi, as my favourite drink, has been used as the most relatable proxy for any beverage that can be bought and paid for, including various forms of branded bottled water and fresh juices.)
Now imagine if someone invented a method by which he could pump Pepsi into those dry water taps and silently deduct 28% from the users’ salary. He is empowered to make users believe that they are getting a fluid which is better than water and has nutrients that in 25 years would make them Arnold Schwarzenegger.
We would not have to wait for the US Food and Drug Administration to take action. There would be a furore in Parliament, journalists would go red in their face condemning it, spokespersons would spar with each other and demand resignations, Right to Information would be invoked and candle light vigils held. Yet that is what Ulips are doing, while the financial media and the MF industry have been crying hoarse about the transformation of the prince among capital market investment vehicles into an insurance frog.
The capital market regulator, the Securities and Exchange Board of India, is merely trying to apply skills developed over 17 years in keeping all capital market vehicles in their princely condition. I personally believe this is a laudable effort.
Krishnamurthy Vijayan is managing director and CEO, IDBI Asset Management Ltd. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org