An off-the-shelf box of financial products needed
4 min read 22 Sep 2020, 10:23 PM ISTIt should meet the needs of a new investor in insurance and market-linked products
PremiumAn average person needs between 10 and 15 financial products to manage the complexity of contemporary life. A few decades ago, when the government was the main employer and would guarantee returns, it was easy to just leave it to the government to fix your life if you were lucky enough to be in the network. Those outside just got by with their own savings in gold, real estate and bank deposits. Opening up the markets boosts both incomes and choices. It pours millions of people into the middle class that consumes not just pizzas and gyms, but also financial products. But given the complexity of the market, even willing on-boarders to formal finance find it difficult to choose. One way to solve this is to have generics in the financial sector. Just as generics cost much lower as compared to branded pharma, we can think of generics that do the basic function without the bells and whistles. What a Jan-Dhan Yojana did for banking can be done by similar products in insurance and market-linked investment.
We can think of a box that we could buy online or off the shelf that has the basic financial products that we need. This box would have a universe of the following products that you can choose out of: medical insurance, life cover, FDs, PPF, and liquid, large-, mid- and small-cap mutual funds. This is just the very basic array of financial products for an average middle Indian household. The insurance regulator has done very well to mandate a standard health insurance policy called Arogya Sanjeevani that every insurer has to offer. You can read about its features at bit.ly/3mBzixc. Though the pricing is left to each insurer, the features are all the same that provide a base-level-no-frills standard health insurance policy. There are features in this generic that are not that good. For instance, there is a co-pay of 5%, meaning that you pay 5% of the bill (in addition to the premium) and the insurer pays 95%. There is a room rent sub-limit of 2% of the sum insured with a cap of ₹5,000 a day. Read bit.ly/35QMMzj to understand sub-limits.
We don’t have data or anecdotal evidence for the claims experience of Arogya Sanjeevani since it was launched in January 2020, so this is not a recommendation to go out and buy this policy. But as a first step, it is good that the regulator is thinking along these lines.
Life insurance has a generic product called term life insurance that can be bought on the basis of low price and high claims experience of the insurer. What the regulator can do is to provide policy-wise claims and complaint data. Or allow generics that tick the boxes of a certain low price and a certain high claims experience to be allowed to enter this box.
The investment options will need to include a mix of guaranteed and market-linked short-, medium- and long-term investments. Most people are able to evaluate an FD basis the interest offered and the PPF is also a generic that is a long-term government-guaranteed corpus accumulator. Both these are options that an investor can tick.
The big struggle for investors wanting to on-board market-linked products is the inability to choose products that work for them. With 36 categories (and growing), a first-time investor into mutual funds is frozen by the choice. To a gold and FD investor, the complexity of deciding on the over 2,000 schemes and even larger options within the schemes is truly impossible. They take the easy way out and look at the last year’s returns and mostly have poor outcomes. An easier on-boarding would be to provide generics that take away the fund manager risk (the risk of the fund manager under-performing the benchmark) and give just the basic no-frills product. This would include: a zero-credit risk, high-liquidity liquid fund aimed at investors who want an alternate to the savings deposit; a very low-credit risk, low-duration, high-liquidity ultra short-term debt fund for investors who want to substitute a bank FD; a broad market index fund (Sensex and Nifty 50), a mid-cap index fund and a small-cap index fund. The indices must be defined by the regulator that will make funds that track it eligible to enter the box. Thresholds on expense ratios and tracking errors will only allow funds that qualify on an ongoing basis to enter. Of course, the regulator needs to engage with the ministry of finance to allow investors to move from a fund that falls out of the box to a fund that enters as some of the cost and other parameters change, without a tax impact.
Indian financial sector regulators need to work together to provide a standard box of financial products that meet the basic needs of a first-time entrant into the formal financial markets of both insurance and investment. Policy wonks in the ministry of finance need to accept that unless the supply side and the marketplace is less intimidating and has fewer tricks and traps, the financialization of Indian savings will happen at a glacial pace.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation
