Mutual Funds v/s ULIPs: What should investors invest in?

The recent happenings in the investment industry, expecially the recent ULIP related issues between SEBI and IRDA have raised quite a bells. Recently, the SEBI chariman, Mr. Bhave, was reported to have launched a scathing attack on Mutual Fund Houses (as quoted by ET), and was critical of the way the funds do business. Another development that happened was ULIP's were given a clear dictate - ULIP's are to be controlled by IRDA, not by SEBI. That has led to lot of worries for Mutual Funds, especially because sometimes back the Mutual Funds Entry load was scrapped by the regulators. That resulted in a big loss of income for these mutual fund houses. (See our thoughts on Should you trust your mutual fund manager?)

Mutual Funds v/s ULIPs: Which is better & What should investors select to invest?

In all these developments, one thing has come out clearly. There are lots of confusing financial products in the market and the investors interest are least thought about. Various AMC, Fund houses, Insurance Companies and other investment firms, come out with their own specially customised financial products, which may or may not ever meet the customer needs. They are sold through agents, who are guaranteed a hefty commission on each sale, and hence a lot of mis-selling happens. Simple because the agents are more interested in "Earning More Commission" rather than selling something which will actually benefit the customers or investors. More importantly, do such products exists which really are serving the purpose of investment like education policy, health plan, insurance plan and so on??? Please see this example Insurance v/s Investment v/s Tax savings – agent based business, where a good example is cited about how investors might fall prey to mis-selling and end up buying something which is not in investors benefit, but agents benefit.

Take a simple example - there is a good financial product which suits the purpose of your investment and it gives a 5% commission to the agent. Then there is another financial product which does not suit your investment purpose but gives 40% commission to the agent.
Now put yourself in agent's place - which policy will you sell - one that gives you 5% or one which gives you 40%?
You trust your agent thinking that he/she knows finance better and you go by his advice. But there is a good enough chance that the agent will sell you something which is not in your favour, but in his favour as a hefty commission.

The recent decision that ULIP's will be controlled by IRDA and not SEBI has sent cold waves across mutual fund houses. The reason - SEBI controls Mutual Funds, and it has (Rightly) barred them from charging any entry load or commission. So investors money is actually invested in full. The agent's commission and entry load are things of past.
However, for ULIP or Unit Linked Insurance Plans, they are controlled by IRDA, where there is no such restriction. It still remains a pure commission & agent based business. Some ULIP offer as high as 60% of first year annual commissions to agents. The industry avaerage is around 40%.

Now think about it. What will an agent sell? Something which will not give him any commission (Mutual Funds) or something which will give him hefty commisions (ULIPs)? Obsiously the answer is ULIP's. They come with loads and loads of conditions and strings attached. Investors need to remain invested for a long period like 15-20 years. Early exits (even like 5 years or so), might see even the invested money not being repaid in full.

So this is where we stand. The Mutual Fund Industry is worried that since agents are not allowed any commissions on selling Mutual Funds, the Mutual Funds will take a hit. On the other hand, the ULIP's will be (mis)sold with high recommendations by the agents, as they are going to give them high commissions. Another point is the word "Insurance". ULIPs stand for Unit Linked Insurance Plan - it has some component of money that goes towards insurance premium. However, the insurance cover provided is usually not sufficient and it ends up being a mix of insurance plus investments, with none of the two purposes achieved.

At this point, Investors should think twice before selecting an investment product. In my opinion, what SEBI is doing is correct - they are looking for investor benefits. ULIP's still require a lot of changes to really become a transparent and beneficial product to customers.

Satyam Busted for fraud: Raju resigns and admits incorrect balance sheet

In a shocking development, Ramalinga Raju of Satyam has resigned from the Chairmanship of Satyam. What is more shocking is that he has revealed about the incorrect details in the Balance sheet of Satyam, which is having inflated values of almost 5040 Crore Rupees. This has come as a big shock to the entire world. Satyam is one of the big IT companies of India and has been sensing some trouobles since last few weeks.

Initially, it was the Maytas Infrastructure deal which was alleged to have all inconsistencies and beign favourable to the family members of Raju. Then the World bank created another uproar by charging Satyam of data theft. And now, the resignation and revelations by Ramalinga Raju seems to be the last nail in the coffin, informing about inconsistencies in the balance sheet of Satyam talking of inflated cash and bank balances.

Till yesterday, there were rumors about a possible Satyam-Tech Mahindra Merger, but the latest news of today will make it more difficult for Satyam. There were issues of Corporate Governance overlooking, and even relationships between Indian School of Business ISB and Satyam have come under the scanner of SEBI and other regulatory authories. Let's hope that something worthwhile comes out of all this unfortunate development. There will be severe implications of all these revelations for other Indian Stock listed companies as well. Worst situation is of the shareholders which saw 20% decline in the Satyam Share price in less than 10 minutes of Raju's resignation news.

Chairpersons Members of Regulatory Authorities/ Bodies IRDA, SEBI, TRAI, CERC, CCI: Sixth Pay Commission Pay Hike

The latest news on from the Sixth Pay Commission. It is regarding the Clarification on Children Education Allowance:
Below, we presnt the text as it appears on the Office Memorandum Ministry of Personnel, Public Grievances and Pensions Department of Personnel & Training. Wikipedia on Sixth Pay Commission Ministry Site

Subject: Revision of pay of the Chairpersons and Members of the Regulatory Authorities/Bodies consequent to the implementation of the Sixth Central pay Commission Recommendations.

Consequent upon the implementation of the Report of the Sixth Central Pay Commission by the Government, the provisions relating to pay of Chairpersons and Members of Regulatory Authorities/Bodies, laid down in this Department's a.M. No. 3/6/97-Estt. (Pay II) dated 29th January, 1998 read with Corrigendum dated 13th February, 1998, shall be substituted with the following:

1. Pay - The Chairperson would be eligible for pay not exceeding Rs. 80,000/- p.m. (fixed) and Members would be eligible for pay in the Pay Band of Rs. 37400-67000 (PB 4) with a Grade Pay of Rs. 12000/-. The pay will be fixed in accordance with the prevailing orders viz. pay minus pension.

2. The pay and allowances of Chairperson and full-time Members of five specified Regulatory Bodies, viz., Telecom Regulatory Authority of India TRAI, Insurance Regulatory and Development Authority IRDA, Central Electricity Regulatory Commission CERC, Securities and Exchange Board of India SEBI and the Competition Commission of India CCI which have been delinked from Government salaries will be governed by the orders issued by the Department of Expenditure.

3. These orders will come into effect from 1.1.2006

SEBI changes P-notes norms: Removes ODI restriction

The news can come as a surprise bounce back to the markets tomorrow morning in India. SEBI officials met today evening in the hi firing turbulance in the global markets to decide the further course of action on the P notes or Participatory notes.

The outcome of the meeting appears to be fruitful, as the SEBI officials headed by Mr. Bhave said: CB Bhave, Chairman, Securities and Exchange Board of India (SEBI), said norms on participatory notes have been revised and the limit on overseas-derivative instruments (ODIs) in both cash and derivates will be removed. "The 40% cap on assets under custody in cash market will be removed".

As per the news, Around 1 year back, in October 2007, the Sebi had banned fresh issue of P-Notes by FIIs. This was done to check the significant flow of foreign funds into the Indian stock markets. The excess liquidity was difficult for the financial market regulators to handle.

What implications can this relaxation of P-notes norms and Removal of ODI restriction have of the markets?
Most probably, the markets should go up in the short term. Experts are of the view that this revision or relaxation can work wonders for the ailing stock markets, atleast in India.
No body knows what will happen tomorrow, but this would definitely send positive signal to the stock markets.

SEBI Eases IPO Process: Refund Process Eliminated: Money to remain in Bank till Allocation

In a big respite to the IPO applicants, the SEBI or Securities and Exchange Board of India has eased out the process of money transfer and eliminated the refund process completely.


In the new setup, the applicant who is applying for the IPO, will not have to send the money to the registrar of the IPO. Instead, the money will remain in his bank account, but in a locked state. Once the allocation is complete, the required amount of money will be transferred to the Registrar of the IPO and the balance money will be set free from the locked state.

This will completely eliminate the process of refund.. As I’ve explained in this article, Should you invest in IPO’s, now the calculations for interest rate earnings will have to re-worked. It is not clear whether the locked money will be eligible to earn any interest or not, but atleast there will be no problems with the delayed refunds, the postal delays in case of paper cheques and other reasons given by registrars for delaying the refund payment. Not only that, it will also save a lot on Postal charges & costs.

Let’s hope to see more such investor friendly and cost efficient developments from the market regulators.

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SEBI to reduce IPO listing time to 7 days

The secondary stock markets are highly efficient!
What lacks is that the primary IPO markets are not that efficient, because of the time lag and delays. That’s what was quoted by the SEBI Chairman, Mr. Bhave, in a recent interview. Mr. Bhave comes up with an excellent suggestion about how the investors can benefit from the IPO without actually having to send the money over the the Book Running lead managers.

Mr. Bhave quotes the example of the recently concluded Reliance Power IPO listing. He mentions that around 4.5 million applications were received from investors. None of the investors got full allocation as the issue was heavily subscribed. Hence, the same 4.5 million applications were required to have 4.5 million refund orders. Therefore, a total of 9 million transactions were to be performed. Secondly, the postal department was also involved, which is another reason for time delay in several of the cases. We need to improve upon this time delay.

What can be done in this case is that we can have a mechanism, where the investors don’t need to send any money cheques with the IPO application. He can simply maintain that money in his respective bank account and there can be some data provided by the banker to the IPO registrar saying that this much money has been locked in the investors bank account for the purpose of applying for the IPO. During the IPO book building time, the money will remain in the investors account, but will be unavailable to him for alternate use. Hence, once the shares are allotted, that much money will be taken from his bank account and the remainder will be again freed from the locked state. This will not only reduce the transaction processing heavily, but will also reduce the time lag. It will also involve more transparency in the system.

A very nice and efficient idea. Let’s see when this will actually get implemented.

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SEBI plans to reduce IPO close & listing day gap to 3-5 days

Some good news for the IPO hungry investors, especially the ones who take a loan to apply for an IPO.
C B Bhave has joined as the new SEBI chairman, and he is into action straightaway.

The latest update from the SEBI chairman is that the time gap between the closure of the IPO and the listing date of the IPO shares will be reduced to only 3 to 5 days.

Sources close to the developments said Sebi was also considering changing the price discovery, bidding and allotment process to eliminate grey market operations and having investor money locked up without interest payments for almost a month.

However, these changes will be introduced in phases.

In the first phase, applications will be allowed in both electronic and physical formats and the time gap between issue closure and listing kept to seven days. Once this 7 day process is found to be stable, the 3 days process will be gradually introduced.

The reason that SEBI is still willing to have the paper based applications is that “Many investors may not be familiar with the e-applications for the IPO, hence we need to keep an alternative for them”.

Also, the paperwork and information required will be set to minimum. Just quoting basic details like Name and PAN no. should be sufficient to apply for an IPO in the paper based application.

The decrease in the time gap between IPO issue closing date and listing date will solve one of Sebi's major concerns that promoters artificially boost demand in the grey market ahead of an IPO listing. Promoters typically take advantage of the time gap between closure and listing to put in bids in the grey market through.
Many brokers also take independent positions on stocks and charge clients a premium for doing so.
Shortening the time gap will also impact institutional investors who may have to pay the entire amount upfront along with their applications, like retail investors do now, against 10 per cent currently.

Related: Should you apply for an IPO

Interestingly, this reduction of time gap will be Highly beneficial for the individuals , who take a loan to apply for the IPO.

They can now realize their actual stock worth in a matter of just 3 to 5 days and hence save a major cost for the interest rate they pay on the loan they borrow for the IPO. Not only them, even individual investors will save a lot as the interest they earn on their money in bank fixed deposits will be preserved. Hope to see some more good developments from SEBI.

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