Ban on loads: a global first

The Securities and Exchange Board of India (Sebi) abolished entry loads, effective 1 August. Earlier, you had to pay charges, typically 2.25%, at the time of investment. These were passed on to agents as commission.

Sebi has been nudging the industry to stop commission-driven sales. In 2006, the 6% cost that open-ended new fund offers (NFOs) bore was removed to stop the churning of money from one NFO to another. Later, in January 2008, the costs on closed-end NFOs were also removed.

Sebi also removed entry loads on money invested directly with fund houses in January 2008.

An industry reluctant to reform made Sebi ask the question: whose agent is he? Clearly, whoever compensated the agent would be the person the agent would serve. This led to the abolition of loads. Incidentally, this is a global first.

You have the option to not pay at all, but you will need to pay if you need the services of an agent. “Service and advice are highly customized. Hence, how much it should cost can be decided only by the investor and not by MF companies (through loads)," says Amit Trivedi, CEO, Karmayog Knowledge Academy, a Mumbai-based MF training institute.

Expect a transaction cost of about 40 paisa on Rs100 invested and an increasing gradient for value added advice and services.

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Now, transact in MFs on stock exchanges

The National Stock Exchange (NSE) was the first to start this on 30 November, offering 30 schemes of UTI Asset Management Co. Ltd. The Bombay Stock Exchange (BSE) followed suit. At the time of going to press, both NSE and BSE offer schemes across 10 mutual fund houses. More fund houses are expected to join the platform soon.

Units will be held in dematerialized form, so you will need a demat account to use this. Instead of filling forms each time you buy a fund, you will simply call your broker. Instead of a fragmented account statement from each fund house, you now get a consolidated statement across your stock and MF holdings.

Saurabh Nanavati, chief executive officer, Religare Asset Management Co. Pvt. Ltd, says: “This technology innovation will help reduce the burden of distributors. It will allow them more time to focus on advising rather than worrying about operational hassles. The process of educating brokers and increasing investor awareness, though, is an ongoing process."

MFs will save costs as paperwork gets reduced. Expect some of these costs to be passed on to you, eventually.

FMPs can’t hint returns, and you can’t exit early

Chasing returns, some fund houses got greedy in 2008 and began investing in junk realty bonds of maturity longer than the FMP tenure . Both caused the risk to go sky high. The 2008 crisis ended the FMP party and in January 2009 Sebi banned funds from indicating return, barely a month after it listed them compulsorily on the stock exchange. Pre-mature withdrawals are allowed only on the secondary market. These restrictions, reduced the product’s attractiveness and investors shifted to other debt funds. But, FMPs should be back in business soon. Says Krishnan Sitaram, Director, Crisil Fundservices, a research unit of Crisil Ltd: “FMPs can still return better, post-tax, returns as compared to a fixed deposit of the same tenure, especially if you invest in double indexation FMPs launched around March."

Unhappy with agent? Shift without pain

At stake is the loyalty bonus, typically 40-50 basis points, that MFs pay to agents for as long as the investors hold the fund. The existing agent didn’t want to let go and would not give the NOC.

Insistence on NOCs caused much distress to investors who changed cities or switched agents due to other reasons. Despite an advice that the Association of Mutual Funds of India (Amfi) had issued in 2007, telling agents not to insist on NOCs, agents continued the practice.

In December, Sebi threw out this process. Now, you can simply write a letter and give it to your new agent along with a copy of your existing MF investment details. “It is necessary for the investor to have the right to decide whether or not he wants to continue with his agent. This will also make the agent focus more on the services he provides," says Rajesh Krishnamoorthy, CEO,, an MF portal.

Liquid funds tweaked to mend their ‘risky’ ways

Restricting the tenure limits the potential of liquid funds to earn returns that give them an edge over a savings bank account. Back of the envelope calculations show that Rs1 lakh invested in a liquid fund that earns 4.75% returns is just Rs230 more than returns from a bank fixed deposit, which gives similar returns but has no risk.

Says Nandkumar Surti, chief investment officer (fixed income), JPMorgan Asset Management India Pvt. Ltd: “This brings more discipline in managing liquid funds. Investor’s risk of loss has been cut down dramatically."

Also, liquid plus schemes were asked to rename themselves. They are now known as ultra short-term bond funds and invest in debt papers that typically mature up to a year. Sebi felt that the name, “liquid plus", gave an impression that these were more liquid than the liquid funds.

To curb mis-selling: limits prescribed for Ulip costs

With upfront costs as high as 70% in some policies and agents getting up to 40% of the first-year premium as commission, Ulips as a product category have been mis-sold for the last few years. Rising markets till 2007 saw a huge push among the urban mass affluent. The year 2008 saw the sorry story of inappropriate equity Ulips being sold to those in the urban informal sector, like house helps and drivers, and in rural areas.

With four different costs embedded in the life insurance product and with costs varying across ages, sum assured, fund type, premium and many other variables, to decode the cost of an insurance product takes a degree in finance. The only handle Irda could find was to use the difference between gross and net returns to cap costs.

New Ulips will be constructed and old ones modified for new customers, in such a way that the difference between gross (total) return and net (post-cost) returns is not more than 300 basis points (bps) for a policy that lasts for 10 years.

Illustration: Jayachandran / Mint

This cost cap is at 225 bps for policies that live for more than 10 years. For example, if your money is earning 10% return every year, the post-cost return should not be lower than 7%. Says Samir Bali, national leader (insurance), Ernst and Young: “Capping of charges would ensure that both the insurer and the policyholder look at insurance as a long-term product."

But following the regulation in words and not in spirit, the industry is quickly launching policies that have guarantees built in. Reason? The products with guarantees do not have to stick to the cost cap.

Another downside of the cost cap in this form is that small-ticket policies are getting difficult for the insurers to service and the minimum premium is moving up. Says Kamesh Goyal, CEO, Bajaj Allianz Life Insurance Co. Ltd: “Insurers may not service low ticket sizes, but moving on all insurers will have to reduce charges. It’s not the cost that drives in business, persistency will be the focus for the regulator and the insurers."

Also, for existing policyholders there is no change as the cap is for new customers and policies. The current reform in capping cost is not going to have much effect, till the basic structure of the product changes to stop the large scale mis-selling of Ulips.

Low-cost and portable NPS did not take off

Despite the lack of interest in the NPS, there are good reasons for you to use the vehicle. Under the NPS, the Indian citizen finally has an option to use the funds generated over a lifetime of work to target a corpus and income for the years in which the human capital will not generate much income.

NPS is the lowest cost, portable and no-load product that is possibly the best in terms of its structure, across the world.

You pay as you go into a fund of your choice out of a universe of six fund managers, offering a choice of three funds each. At most, half your money can go into an index-linked equity fund, the rest is in safer debt products.

This account is locked till age 60. On maturity, you can withdraw up to 60% of the corpus as lump sum and the rest will buy an annuity, a product that ensures a regular payout for life, from any of the insurers. If you don’t want to choose the fund, and most people don’t, the default option will put you in an asset allocation that is linked to what suits you at your current age. As you age, the allocation will change in favour of debt.

To take away the “ownership" of the customer conflict of interest, which drives mis-selling across the world, the pension regulator, Pension Fund Regulatory and Development Authority (PFRDA), chose a Central Record-keeping Agency (CRA) model. It is the CRA that has your details and allots you a unique permanent retirement account number (PRAN). Technology ensures that this number is portable across geographical locations, banks and employers.

Costs is another area that gets NPS ahead of other competing products. There are no entry loads and the annual cost of fund management is a meagre 0.0009% of the fund value per annum. The comparative number is 2.50% in mutual funds and 2% in insurance. Portability across funds, once a year, also allows greater flexibility to the investor. However, NPS has a tax disadvantage compared with the employees provident fund or an insurance policy since the proceeds are taxable as income.

Despite a tepid response to Tier 1, the regulator has gone ahead and launched the Tier II account, which works on a similar backbone. The only difference is that of flexibility—you can withdraw anytime you like from the fund. Both contribution and the maturity are subject to tax.

Life insurance agents to stop churning

But since September, this agent churn has been curbed. The insurance regulator has made it mandatory that insurance companies enter into a three-year contract with all their agents and regularly submit the list of erring agents.

To encourage agents to service policies for the entire tenure, agents who leave the insurance company within five years will not get renewal commissions.

As these commissions are about 5% of the premium, it can be a steady source of income. Says Paresh Parsnis, CEO, HDFC Standard Life Insurance Co. Ltd: “For professional agents, renewal commissions are an important source of income as they are able to build a large customer base over a period of time."

Regulation will now make it mandatory for the agent leaving his agency to entrust the responsibility of servicing the policy to other agents to ensure that you always have a face to turn to.

Though it has come a bit late in the day, but the regulation is much needed to address the issue of agents churn.

Says Parsnis: “By ensuring that agents stay with one insurance company for a longer period, even the insurer will get encouraged to invest in the agents in terms of imparting the necessary skills. The bigger problem is that only 20% of the agent workforce bring business to the company."

Health plans: no-sweat renewals

Photo: Madhu Kapparath / Mint

The year 2009 was one in which the health insurance industry took significant steps to become more customer-friendly and less complicated.

In April, the Insurance Regulatory and Development Authority curbed the arbitrary practice followed by some health insurers of abruptly refusing to renew policies or nudged policyholders to take a different health insurance.

It is now mandatory to specify in the policy document the age till which a health insurance policy will be renewed. A maximum renewal age of 75 would mean the insurer cannot refuse renewing your cover till you are 75 years old. The insurer will also have to state the circumstances under which, and the extent to which, renewal premiums would be alterable at least three months before the change takes place.

The year also saw a uniform grace period of 15 days within which a policyholder can renew his health insurance policy. Another cheer went up when the maximum age of entry into a health insurance plan went up to 65, up from the earlier 60 years.

The end of 2009 also saw the green flag being shown to life and general insurance companies offering combo policies. Known as Health Plus Life Combi Product, this policy is a bundled product of a pure term life cover plan with any health insurance variant. This is much like what life insurance companies are offering currently. Now it is possible to get a reimbursement health insurance plan that covers hospitalization expenses, to be bought along with a life cover.

Graphic by Yogesh Kumar / Mint