The Hindu Business Line : MFs: Wake up to ULIP challenge

Fund houses must warm up to the fact that their products are being rendered ineffectual by insurance companies, at least to a section of the market.

THE CEO of a mid-sized mutual fund fished out a boarding pass from his breast pocket - he had flown in from Mumbai that morning - which carried an advertisement issued by a well-known insurance company, part of an international group that is quickly emerging as a serious player in the Indian banking sector.

What was funny was the way he displayed it, abruptly, without giving anyone around much of a chance to react. What wasn't so funny was the message he had to share. The insurance company, after all, was happily telling the world all it could about its latest unit-linked product.

The CEO of the MF, only too aware that he had to fight it out with others in a dangerously competitive market, lamented that fund houses are probably losing the battle against ULIPs, an issue that has already raised quite a storm in the rough-and-tumble world of investment. That issue, one may add, has been the subject of this column some time back but must be revisited to factor in some of the latest trends.

But, first, imagine this. You are a 30-something investor, always searching for the best ways of deploying your money. An insurance company approaches you, promising to marry insurance with the returns generated by investing in the market.

Will you opt for the unitised product that is being offered? Obviously, there is no simple Yes or No answer, but chances are that you will think twice before deciding.

If you are bent on replying in the affirmative, consider the costs that are involved. The premium that you pay in the first year will not be entirely invested - in fact, do not be surprised if you see the insurance company taking out a big chunk of it (may be 20 per cent or even more, depending on the insurer) by way of expenses. A senior marketing executive at SBI Life Insurance Co, who was recently introducing the company's first unit-linked plan, claimed that it is among the lowest-cost products of its kind.

The first-year expense, in his case, is 15 per cent.

However, the truth is that ULIPs are selling well in India. We don't have to back this statement with the latest numbers; all estimates suggest that insurance companies are increasingly becoming confident about this class of products.

This is evident from the sales figures that are being quoted by various marketing personnel engaged by insurance companies, especially the new private sector players. Quite plainly, investors are increasingly finding merit in unit-linked options.

That brings us right back to mutual funds, especially to what the latter are cribbing about. Fund houses must warm up to the fact that their products are being rendered ineffectual by insurance companies, at least to a section of the market.

The time to mobilise support in policy-making circles on this issue has come. This is also the time to take investors into confidence.

And as for the CEO we referred to at the beginning, he was probably doing the right thing by flashing his boarding pass, complete with the ULIP advertisement.

As well-wishers have no doubt told him, in this world, only the paranoid survives.

Feedback may be sent to nilanjan@thehindu.co.in

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