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This amounts to grabbing investors' money

Jun 25, 2010

In this issue:
» Lock-in of ULIP funds amounts to money grabbing
» What caused the financial crisis?
» Huge under recoveries in fuel prices
» Its raining M&A deals
» ...and more!!

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If you ever meet an insurance agent, chances are you will get to know about unit-linked insurance plans (ULIPs). They provide insurance benefits and excellent returns, you'll be told. No one will bother to explain that ULIP premiums are much higher than those for a pure insurance product. You also take an exposure to stock markets. Why not take a pure term insurance instead? And invest in stock markets independently or through a mutual fund? Of course, that suggestion would cost the agent his commission.

Investors eventually wake up to the reality of the product. So it doesn't come as a surprise that many ULIP holders eventually tend to withdraw prematurely. As per reports, the finance ministry is trying to address that. Apparently, the new direct tax code will disincentivise withdrawal of money from ULIPs by enhancing the lock in period and extent of withdrawal. This will facilitate the deployment of funds for long term projects like infrastructure.

We are all for encouraging people to save for the long term. We also support measures to build infrastructure in India. But to our mind this seems like a confiscation of investors' money. Why should the money of a gullible public be taken in the name of insurance and then frozen in infrastructure? Those who wish to invest in infrastructure can do so through more direct instruments. Why usurp the investors' control over his or her own money?

Do you think anyone ever is going to be upfront about ULIPs? Share with us.

 Chart of the day
Source: Petroleum Planning and Analysis Cell

Today, an empowered group of ministers is set to meet and take a decision on fuel price deregulation. It is likely that petrol prices will be freed. But as the chart of the day shows the maximum underrecovery stems from diesel and kerosene. In our view, given the politically sensitive nature of these fuels, there won't be much of a hike. In fact, it remains to be seen whether the government will stick to its guns if crude oil prices were to shoot upwards from the benign levels currently. It is only in adverse conditions that its resolve to deregulate the sector will truly be tested.

It is true that regulators globally are now skeptical about loosening their grip on banks. The RBI too is keen to keep an oversight. This is despite requests to allow more players in the Indian banking space. Hence it wishes to allow only those NBFCs that are sufficiently capitalised to get into banking. The RBI has proposed a minimum net worth of Rs 10 bn for new entrants in Indian banking. This is three times the minimum capital prescribed for new players earlier this decade. Given the capital crunch many banking entities (particularly the PSUs) are facing, the RBI does not wish to entertain more such players. Also sufficient capital adequacy will ensure that the new entities find it easier to comply with the CRR and SLR norms. While this certainly makes a lot of sense, we believe that such entry barriers are not enough. Besides ensuring that the new entrants are well capitalised, the RBI should also check the quality of the applicants' past operations. This could ensure that unworthy candidates do not enter the space at the cost of more deserving ones.

It's raining deals on India Inc. We are talking about the merger and acquisitions (M&As) that Indian companies have entered into during the first six months of 2010. In all, these M&A deals have totaled US$ 40 bn so far this year. This has however been largely helped by the two mega deals from Abbott and Bharti Airtel. Abbott acquired the domestic business of Piramal Healthcare for US$ 3.7 bn in May. Before that, Bharti acquired Zain Africa's assets for US$ 10.7 bn. In fact, Bharti's transaction was also the largest in Asia during this period. Talk about coming of age of Indian companies!

The Indian Rupee is set to get a new face, putting it in the league of international currencies like the Dollar, Pound, Euro and Yen. One out of the final five symbols for the Rupee will soon be shortlisted. These were selected as part of a design campaign launched by the government last year. A similar campaign was also used for the Euro. This new emblem will give a much needed push to using the rupee in overseas trade. Neighboring countries like Bhutan, Nepal etc. already accept the stronger Indian currency. Having a well marketed symbol may increase its acceptability in other countries in the region as well.

It is difficult to attribute the entire financial crisis to just one thing. But if at all we have to do it, excess debt will certainly be our top choice. Clearly, the developed world had been on a debt binge for quite some time now. As the Economist puts it, Western consumers used debt to enhance their lifestyle. Companies borrowed to expand their businesses and investors employed debt to enhance their returns.

Thus, when annual expenditure exceeded income, the result was happiness and not misery. So much so that even the government encouraged such a behavior. However, debt levels cannot exceed income forever. An end to the game had to come. We believe such an end came in 2007-08. Eventually people realized that all that the humungous debt that has been accumulated cannot be repaid. Thus, some pretty strong adjustments are necessary. We believe there are two choices. Huge spending cut backs and making economic growth faster than before. However, both the options will mean that the governments will have to take some very bold steps. But do they have the necessary political will to do so? Well, our guess is as good as yours. What is more certain though is the fact that we indeed face an uncertain future.

There are many changes that are taking place in the Chinese economy. And the important one among these is that China is gradually banking on its people to drive consumption in the economy. China's previously export oriented business model was going great guns before the crisis. But once the crisis escalated, several cracks were suddenly visible in the model. Especially when overseas demand slowed down. Further, China has also allowed its currency Yuan to appreciate against the US dollar. This means that exporting from China will be an expensive proposition. But there will be more incentive for domestic consumption. To add to this, the Chinese government has also had to undertake wage hikes. This only implies more purchasing power for the average Chinese worker. Indeed, the global financial crisis has led to introspection on the part of governments across the world. More so for the rich countries. But even those economies having fared better (including China) have had no choice but to adapt to drastic changes that a crisis of this sort is bound to bring.

Meanwhile, Indian markets cut a substantial portion of their losses as buying activity intensified during the post noon session. At the time of writing, the BSE-Sensex was trading 84 points lower. Stocks forming part of the power and healthcare spaces were amongst the top gainers, while those from the IT and banking spaces were trading weak. The market sentiments in other Asian regions were quite negative with Japan, Hong Kong and China trading lower by about 1.9%, 0.2% and 0.5% respectively.

 Today's investing mantra
"Where the company has the highest credit rating because both its past record and future prospects are most impressive, we find that the stock market tends more or less continuously to introduce a highly speculative element into the common shares through the simple means of a price so high as to carry a fair degree of risk." - Benjamin Graham

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23 Responses to "This amounts to grabbing investors' money"


Jun 28, 2010

For every service there is a cost involved. Its generally the buyer of the service that bears the cost. Had mutual funds offered decent commissions, an angent would certainly have sold a term + mf. At times when the commissions on MF's have hit bottom,its a question of survival here and hence ULIP's are being sold. Would you pay commissions to your MF agent for the service he is providing ? Mis-selling prevails when there is no incentive for right selling. Blame SEBI and not the advisors for the woes........


Praveen Godbole

Jun 28, 2010

ULIPs are the best example to misselling. Its a negative sum game, with investor losing. But what beats me is this. MF investor always knew that when he gives a cheque for Rs. 10,000, only Rs. 9750 gets invested in his name and Rs. 250 is upfront commission paid to agent. But same MF investor, when asked to give a cheque of Rs. 9,750 in the name of MF and Rs. 250 in the name of distributor, is not willing to invest! He would rather invest in ULIP which is a clear case of dacoity! Yet investor is willing.



Jun 27, 2010

i am an insurance agent. it is not only the agents fault. when i am trying to explain my investors about the ulips and the cost involved in that. and i introduced them a sip and a term policy. only very few turn out. most of the people take ulip with others. why attracted by the returns show by the insurance company and agents. people believe in lic and sbi they are showing with the past performance and people believe it.



Jun 26, 2010

The financial system of our country is ruled by many mafia’s such as politicians, underworld, insurance firms governed by IRDA, Banks, etc. The normal person (despite of the degree he is holding) has no choice, but to slip into one of these traps knowingly or unknowingly, because we are so good to trust the smiles, forced to meet our requirements or, sometimes, greedy.
God only can bless us!!!


Naresh Ramchandani

Jun 26, 2010

Its true, it is the investor who should decide whether he wants to stay invested in...whatever be the type of instrument. If they put in a lock in period then they should also make sure that the people who sell these products do not cheat the public. I was missold a ULIP by ICICI in 2007 saying that I would get 30 to 40% returns p.a. Right now after 3 years my ulip is still down by 15%. The lesson learnt is never invest in ULIPS. Better differentiate and invest separately


ashok kumar

Jun 26, 2010




Jun 26, 2010

i was a fool.fool beyond any body can be. i have purchased LIC money plus ULIPS. The best instrument ever the LIC had to chit the public. I request the general public to remain away from ULIPS and LIC too.


Suprokash Ghosh

Jun 25, 2010

There is no doubt about the fact that ULIPs are one of the worst "investment" one can make. Both IRDA and the government are fully to blame for this situation, as they are acting only for their vested interests. We, the small investors, are also helping their cause by stepping into the trap they have laid out. Sadly almost 90% of the insurance buyers buy life insurance for LIVING benefits, and not DEATH benefits. When people buy car insurance or any similar insurance they pay the premiums but do not expect a return at the end of the term, unless there is a valid claim. They know they are buying a risk cover. But when it comes to one’s life insurance the same person expects a return if they survive the term. What a joke!
When such a situation is prevailing and the regulator is behaving as a sidekick of the insurance companies, we, the small investors, need to take the control in our hand. We need to financially educate ourselves and reject all such trash financial products. Financial education is very important to avoid such traps and more so because it is not taught in the schools or colleges. You may be a Doctor, Engineer, MBA or some respectable degree holder but that doesn't guarantee that you are financially literate.
If people want to buy insurance they should look for pure term insurance and invest the remaining through other channels BUT NEVER BUY ULIPs.


C. Kumar

Jun 25, 2010

In brief, the insurance industry is working like a "Mafia".


sai sudeer

Jun 25, 2010

The problem with the small investor is that they cash out (in the case of MF, FD etc) even for a small requirement / emergency thereby destroying the benefits of long term investing. Even the National Pension Scheme has a lot of drawback - high cost, delay in allotting units after receipt of money, the performance difference in equity schemes between funds investing in indices, maximum allocation in equity limited to fifty per cent. Situations like this will force people to go into ULIPs, knowingly.

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