Sebi’s pitch for combo products may work for small investors
February 6, 2025
Sebi chairperson Madhabi Puri Buch's announcement on a consultation paper for products combining investment and term insurance has been well-received by market players.
Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch’s latest announcement on coming out with a consultation paper on products that will combine investment and term insurance has been received well by market players.
However, investment advisors aren’t too sure if such products should be promoted, as they lead to confusion among retail investors.
Last Friday, Buch said in the Institute of Chartered Accountants of India’s event that the regulator is working on a new product under which investors will have an option to pair mutual fund investments with life insurance to expand financial access.
At present, unit-linked insurance plans are combination products, which come under the Insurance Regulatory and Development Authority of India (Irdai). However, though they are promoted by many agents as investment products, especially when the stock market is doing well, their main purpose is to provide insurance cover.
No wonder, experts are divided over such products. According to Envision Capital MD & CEO Nilesh Shah, this product will be good for an investor who is starting off.
Moreover, it will promote the businesses of insurance companies and could lead to potential tie-ups with asset management companies. He said while there will be challenges, the regulators will come up with a way to overcome.
Mohammad Shaukat Ali, fund manager at Monarch PMS, believes that this move may not create a new market as these hybrid products already exist. But this can lead to sophistication and standardisation, he said.
The main problem will be the cost difference between the two kind of products. Currently, insurance agents charge significantly more than mutual fund distributors. For example, commissions for insurance agents can be as high as 20-30% in the first year or even more in some cases.
This comes down in the later years. The insurance regulator has working on reducing this upfront fees. In comparison, mutual fund distributors can charge only between 0.1% and 2%. And if the investor chooses the ‘direct’ option, the commission comes down further.
UR Bhat, director, Alphaniti Fintech, believes that while it might be good for investors, Irdai may not be too happy because mutual fund companies charge significantly lower costs.
From a personal finance perspective, most believe that insurance and investment should be separate. Sonam Srivastava, founder and CEO of Wright Research, believes that investment and insurance should not be mixed as both of these have separate functions.
“An insurance product focuses on security whereas mutual funds on returns. If you invest in them separately, the overall premium would be lower and returns higher,” said Srivastava.
According to Buch, the aim is to reach areas where systematic investment plans (SIPs) have low penetration despite significant growth potential and the combo product will offer investors an affordable solution that combines mutual funds with life insurance. She added that life insurance premium would have minimal additional cost due to existing expenses related to onboarding and servicing investors.
In 2010, some mutual funds had launched such combination products, leading to a turf war between Sebi and Irdai. As a result, the FSDC or Financial Stability Development Council was set up by the government as a super regulatory body.
[The Financial Express]
