Home / Opinion / Can NPS be advertised as ‘safe’ when ETFs cannot?

The pension regulator got a bit of a beating last week on Twitter. The chatter was around a National Pension System (NPS) advertisement issued by the regulator calling a market-linked product “safe". The ad, which can be seen here: http://mintne.ws/1SVoozI , calls the NPS a “safe retirement fund". The anger, predominantly in the mutual fund space, is around allowing a market-linked product to advertise itself as ‘safe’, when half the money of an investor can be invested in an actively managed portfolio of stocks. The Pension Fund Regulatory and Development Authority (PFRDA) may have been closer to the word ‘safe’ before 10 September 2015 (http://mintne.ws/1NObGeq ) when NPS funds could be invested only in exchange-traded funds (ETFs) that mimic broad market indices like the S&P BSE Sensex and CNX Nifty, but now that they can actively manage stocks, it is not just market risk but fund manager risk that they face. At a time when the capital market regulator—so say some newspaper reports—is considering adding the words “fund manager risk" to market risk in its disclaimer, this PFRDA ad is causing heartburn.

The Securities and Exchange Board of India (Sebi), in fact, has the strictest regulations among the three regulators that sell market-linked products. The Sixth Schedule of the Mutual Fund Regulations 1996 and subsequent additions to it have made mutual fund ads stay away from assuring ‘safety’ or talking up returns. To the contrary, the disclaimer that “mutual funds are subject to market risk, please read the offer document carefully before investing" makes investors wary of the product and perceive it as ‘risky’. Unlike life insurance companies, mutual funds are not allowed celebrity endorsements.

The story of the insurance disclaimer is the strangest. Since the 1938 insurance Act, all life insurance advertisements were accompanied by the disclaimer that “insurance is the subject matter of the solicitation" (sic). This comes under section 9(i) in the Insurance Regulatory and Development Authority (Insurance Advertisements and Disclosure) Regulations, 2000 (http://mintne.ws/23G28hg ) and is interpreted to mean ‘buyer beware.’ One insurance expert I spoke to said that the intention behind the line seems to be to warn consumers that despite the fuzzy sales pitch and the investment spiel, customers must not forget that they are buying a life insurance product. As of 4 November 2015, this requirement has been removed by the Insurance Regulatory and Development Authority of India (Irdai) (http://mintne.ws/1nBDBJk ) and insurance ads need not carry this disclaimer anymore. Several insurance company chief executive officers (CEOs) seemed to be unaware of the notification and nobody seems to know why Irdai did it.

So we have a market with three regulators, each has market-linked products under its watch, and each has different rules on what can be said in advertisements. PFRDA, by calling the NPS ‘safe,’ has reopened the debate on regulatory arbitrage and the consequent investor confusion. If NPS with active fund management can be called ‘safe’, why can’t ETFs offered by mutual funds, which are much ‘safer’ than managed funds, be called safe? Remember that risk comes in two forms to the equity investor. Market risk is nothing but the risk of markets going up and down, taking your money with it. And fund manger risk is the risk of choosing a fund manager who performs badly. Actively managed portfolios face both market risk and fund manager risk—as is the case with all mutual funds, unit-linked insurance plans and NPS with an equity exposure. But product categories offered by mutual funds such as index funds and ETFs face only market risk since the portfolio created mimics a stock market index such as the Sensex or the Nifty. Your money will do as well or as badly as the market index in an ETF; you would have lost the extra return a well performing fund manager would have made, or you would gain if the fund manager underperformed the index.

The contradictions get starker every day. India has a financial sector market that is split by regulatory turf rather than product function, and each regulator has its own rules of the game. The example of just what can or cannot be said in an ad as a disclaimer is yet another aspect of the problem. Others include different tax treatments, investment guidelines, costs and commission structures and limits. Most policy debates in the area of financial inclusion and financialisation of the Indian household savings tut-tut over the silly Indian investor who chooses gold and real estate over modern market-linked financial products, but they fail to see the confusion on the street caused by the regulators themselves. Inability of the regulators to work together gets us to the stage where each regulator has mandated asset management companies to be set up, totally taking away the economies of scale in the market. Worse, for investors, it is confusing to deal with the same company that does many things. XYZ Bank also has XYZ mutual fund, XYZ life insurance and XYZ pension manager.

If the government is serious about inclusion and financialisation, this very obvious but difficult problem must be dealt with. Else, we can keep paying the import bill for gold.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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