Since the 2008 sub-prime crisis, there has been a collective surge across the world to reduce unfair practices, be it in politics or in business. You can also gather such collective energy to encourage mutual fund companies and insurance firms in India to offer more meaningful products.
Whether it is the anti-corruption protests in India or the insider-trading cases in the US, one factor seems clear as 2012 draws to a close — all of us want fairness.
And that means improving the credibility of the institutions that offer goods and services we consume. In this article, we discuss how you can demand such credibility from the asset management industry and the insurance companies in India in 2013.
INVESTMENT PRODUCTS
There is a bias among mutual fund companies to offer active funds. It is moot whether this bias is because fund companies believe they can generate higher returns than the benchmark index or because active funds charge higher fees. These companies can establish credibility by offering passive funds as alternative investments to the active funds they currently manage.
That is, if a mutual fund company has an active fund with BSE 100 as its benchmark index, the company should also offer BSE 100 Index Fund. At present, there are not many passive products available in the market.
The lack of passive products forces you to assume additional risk, as active funds have manager risk besides the market risk that index funds have. You should, hence, demand passive products including ones on thematic indices such as CNX Commodities Index.
Next, consider products that mutual fund companies offer to help you invest abroad. These products are typically offered as fund-of-funds. Most of these products offer traditional investment opportunities in equity markets such as Latin America.
The marketing spiel is simple: you should buy such funds because they offer ‘diversification’.
You should realise, however, that investing in other equity markets will not meaningfully reduce your risk. Your objective of investing outside India should be to gain access to newer strategies; these include low-volatility strategy and hedge-fund replication strategy through ETFs. You should, hence, drive Indian fund companies to offer such foreign funds to you.
INSURANCE PRODUCTS
Life insurance companies experienced loss of credibility because of mis-selling with-profit policies. These are contracts that pay survivor benefits with returns that make bank fixed-deposits look attractive. In addition, life insurers are perceived as institutions that do not easily settle claims.
One way companies can improve their credibility is to aggressively offer term insurance policies and enhance customer perception that they settle claims fairly. Term insurance offers pure risk cover, where you pay low premiums because your beneficiaries do not receive survivor benefits. Why should you demand such products? The reason is because insurance is about indemnifying losses. And when the insured dies, there is loss of income and, hence, consequent loss in the family’s standard of living. Further, most term policies cover till the age 80. You should, perhaps, push insurance companies to offer risk cover till 85, if not more.
Next, you should drive insurance companies to offer inflation-adjusted annuity products. Annuity is a product that pays you lifetime income for a purchase price. It is, indeed, an important part of a retiree’s portfolio.
At present, however, such products are not inflation adjusted, which is unfortunate; for inflation is a risk that can dramatically lower our standard of living.
We may not have an appropriate inflation index to capture the loss in household purchasing power. But it is time insurance companies play an important role in developing a credible inflation index and offer inflation-indexed products, as such products are the need of the day.
VOICE YOUR DISSENT
You will most likely continue to voice your dissent against unfair practices in 2013 to improve the credibility of services you consume.
We suggest that you voice your opinion to the financial service providers as well to prompt them to offer products that are useful to improve your standard of living. If you do not actively demand such products, why should the industry offer them?
(The author is the founder of Navera Consulting,
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