At the heart of India's savings and investments sector, there is a large regulatory anomaly that is likely to cause grave harm to the average saver. The alarming part is that even its existence doesn't seem to be officially recognised.
Here's the problem. Readers often hear me talk of 'the Indian mutual fund industry'. However, there are actually two mutual fund industries in India. The two are regulated according to completely different standards by two different bodies with wildly divergent standards of transparency, costs and commissions. One is called insurance and the other mutual funds.
By now it is very clear that the India's so-called life insurance industry is actually a high-commission, low-transparency version of the mutual fund industry. Pure insurance is an increasingly small fraction of insurance companies' activity.
Why am I upset? It is simple: ULIPs-are a rip-off.
Basically, ULIPs are mutual funds with some seasoning of insurance to gain regulatory advantage.
Unlike regular mutual funds, the insurance industry is able to sell them under a very high commission structure. By disguising their mutual funds as insurance, life insurance companies get away with commissions in the range of 30 or 40 per cent and sometimes much more.
The net result of high-pressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, the Public Provident Fund (PPF), post office accounts and many other asset types are ending up in ULIPs, with a good portion sponged off as commissions.
Which is where the regulatory arbitrage comes in. SEBI, RBI and now PFRDA are very different from IRDA, which regulates the insurance industry. IRDA seems simply less bothered in the well-being of the investing public and more in the well-being of the insurers.
This is not a minor problem — it's a huge regulatory failure, and the real on-the-ground situation is that it's not going to change any time soon.
The insurance industry is remarkably influential in Delhi and its huge advertising spend ensures that the media too treats it gently.
How do we handle this?
If you are smart enough to look beyond the emotional advertising, you probably have a chance to make the right choice.