Two institutions that have impacted retail investors

Two institutions that have impacted retail investors

Last Updated: Thu, Sep 13, 2012 03:50 hrs

Certified financial planners and other advisors may state ad nauseum that mutual funds score over investment-oriented insurance policies. However, that has not deterred 'investors' from flocking to such policies.

Consequently, most well-meaning advisors wring their hands and attribute this 'pull effect' to the tax benefits enjoyed by insurance policies, the perceived benefits of purchasing a 'bundled product' and also to the 'push effect' of salesmen motivated by huge commissions. However, I feel that history is on the insurance sector's side and against the mutual fund industry and believe the reason for this might go back many years.

According to me, it boils down to the contrasting stories of two iconic Indian institutions viz. Life Insurance Corporation of India (LIC) and the Unit Trust of India (UTI). Investing is an act of faith. It involves handing over your hard-earned money/capital to another person or institution, who is entrusted with the task of increasing it on your behalf. So, obviously you would prefer to hand it over to someone you trust. And, trust, once broken, is difficult to regain. At one time, both these institutions, were thought to be above reproach, since both were owned either by the central government or by entities affiliated to it. This led to the belief that investments in both these were implicitly guaranteed against any capital losses.

Hence there was hardly any urban middle-class household without exposure to either of these two entities. And nearly an entire generation of Indians did benefit through this association. As LIC was only offering debt-oriented policies (ULIPs were not around at that time), no policy holder suffered capital losses of any kind. On the other hand, while UTI was ostensibly a mutual fund, its most popular product, 'US1964', was a unique hybrid product which could not be classified even as a balanced fund.

Despite the fact that the mode of its Net Asset Value (NAV) calculation was opaque and arcane, its investors could not care less as they were regularly getting bonuses and dividends. However, the complacency was rudely shaken when, in 1998, it was revealed that US1964 was akin to a Ponzi scheme, with no one really having a grip on the value and quality of its underlying assets.

This led to a witch-hunt and a compromise solution wherein investors had to take a hair-cut on their investments. This resulted in investors deeply mistrusting the concept of mutual funds (even though UTI in its erstwhile form was not really a mutual fund) and no amount of improved regulation/transparency since then has really turned the tide. This, despite a slew of private sector mutual funds (and even UTI Mutual Fund in its new avatar) which have performed commendably over the past 15-odd years.

Whenever the torch-bearer/talisman for an industry belies the faith of investors, it sets the industry back by quite a few years. This is especially the case with financial services, where investors have nothing concrete to hold onto. Today, mutual funds are well-regulated, but the ghost of UTI haunts the sector.

In the case of LIC, while the company has done nothing extraordinary, its perceived stability renders investors to view it favourably and this has helped the cause of several private insurance companies too. That is why, while LIC has steadily lost market share over the last decade, it is still seen as a brand ambassador for the industry and many private sector agents too begin their spiel by quoting LIC to their prospects. While I certainly do not want LIC to implode, I am waiting for the day when mutual fund investors forget the sorry story of UTI and move on. I do hope we will not have to wait for a whole new generation of investors to unequivocally embrace mutual funds.

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