Big Story

A quarter century of change

| Updated on January 28, 2019 Published on January 26, 2019

Choices have increased across asset classes, products have evolved in line with customer needs and regulations have been tightened, helping win investor trust

Fixed Income: More options on the platter

Radhika Merwin

Indian savers have almost always had a torrid affair with bank deposits; banks have been at the core of mobilising savings in the country since nationalisation. The other two favourites over the last 50 years have been corporate and NBFC deposits and small-savings schemes. But sometime in the mid-1990s, savers also began considering other instruments such as units of mutual funds, shares and debentures.

Over the last 25 years, while the basket of fixed-income products have more or less remained the same for investors, interest rates and regulatory changes have been significant. Rates were first rationalised and then deregulated in early 1990s, barring a few rates both on the deposits and lending sides. With this, the rates on term deposits fell from 12-13 per cent in 1995-96 to 9-10 per cent by the end of the millennium. And with that ended the golden era of earning double-digit assured return on bank deposits, much to savers’ disappointment. In fact, deposit rates went all the way down to 5.25-5.5 per cent by 2003-04.

Small-savings, a safe bet

While this led to decline in rates of other savings instruments too, the fall was much lower, drawing investors towards small-savings schemes that have generally, over the past decade and a half, enjoyed higher rates than plain vanilla bank deposits. Even in the low interest rate period when a three to five-year bank deposit earned a measly 5-6 per cent, interest rate on PPF (Public Provident Fund) or National Savings Certificate (NSC) or post-office term deposits fetched a tidy 8-9 per cent. The safety and tax benefits under small-savings schemes also remained a big draw.

In the past decade or so, tightening of the regulatory noose around other fixed income options, however, widened the scope of investment. For those willing to take on some risk —market-related or otherwise — corporate/NBFC deposits and NCDs that fetched much higher returns, started to draw more attention. The deluge of tax-free bonds that were issued by State-run infrastructure financial companies between FY12 and FY16 also kindled huge retail investor interest, as income from these bonds were exempt from tax.

More simple, transparent

In recent years, investors have also been more actively buying NCDs and tax-free bonds from the secondary market, though the depth of the bond market is still quite shallow. Also, the entire process of buying government bonds by retail investors in the primary market has become a lot simpler, with players offering the facility through exchanges as aggregators.

The SEBI’s re-categorisation norms for mutual funds brought in last year have also made it less complex for investors to park money in debt funds. More transparency and standardisation of funds are likely to boost participation of retail investors in debt-oriented funds.

Investors may continue to be wary of market-linked options. Small-savings schemes that continue to score on safety, ease of investing and tax-effective returns are likely to retain their sheen. The new format small finance banks that also enjoy deposit insurance, too offer some chummy deals.

Mutual Funds: Customer friendly, transparent products

Even as the mutual fund industry moved from strength to strength over the past 25 years, with ever-expanding assets, schemes steadily became investor-friendly in cost, transparency and simplicity.

With barely a few players such as UTI, SBI, and Kothari Pioneer in the early to mid ‘90s, we now have 44 mutual fund houses.

Better disclosures

The NAVs of schemes were disclosed only once a week in the early ‘90s. The portfolio of the stocks held by funds was not revealed on a periodic basis.

The repurchase price for investors was often higher than the fund’s NAV. Investors who sold units of mutual funds often had to do so at a discount due to lack of enough liquidity.

From 1996, daily disclosure of fund NAVs became a mandate from market regulator SEBI for investors to be aware of the current market value of their investments on a daily basis.

Then, with the coming of several private sector and foreign players, the industry started becoming competitive. Alongside, the regulator also made the publishing of portfolio holdings for funds compulsory on a monthly basis.

Thus, investors were in the know of where their money was parked.

With foreign investors coming in and the Indian markets opening up in the mid to late 90s, liquidity improved and investors could buy and sell units at the end-of-day NAVs of schemes.

Costs reduce

Mutual funds had to trim costs at various stages over the past 25 years, largely because of regulatory push, apart from, of course, swelling asset sizes. From 2004-07, there was a massive rise in mutual fund AUMs.

But apart from charging 2.5 per cent of assets (for corpus levels in excess of ₹300 crore), funds also charged ‘entry loads’ to the tune of 2.25 per cent on lump-sum and SIP purchases of units.

For NFOs, charges were as high as 6 per cent.

SEBI banned entry load from August 2009 and, in a single stroke, costs for investors became a lot lower.

Then next disruption on costs came in 2013, when the regulator mandated the offering of ‘direct plans’ to investors. Thus, every fund had to offer two options — a regular plan where investments were typically routed through distributors and a direct one, where amounts were invested without an intermediary. For a typical equity fund, there was an average saving of about 50 basis points for investors.

Finally, the SEBI also reduced the total expense ratio (TER) across-the-board for schemes at various slabs, bringing costs down further by 30-40 basis points.

Fund houses were also asked to pay distributors only from the scheme investments and not from their AMCs.

Of course, SEBI allowed up to 30 basis points to be charged by funds for assets collected from smaller cities and towns outside the top 15 centres.

Making products simple

In the nascent stages of the MF industry — in the early and mid ‘90s — most schemes on offer were close-ended. But with the entry of new private fund management companies, mostly offering open-ended schemes, the others in the industry followed suit. As a result, a large wave of investors rushed in. Over the years, schemes became a bit unwieldy with their names being out of sync with their portfolio holdings in both debt and equity funds.

Last year, SEBI brought out water-tight regulations on how funds should be classified across equity and debt schemes with rigid mandates on allocations based on market capitalisation of stocks, asset quality and the like. Funds sold holdings and rejigged their portfolios to adhere to the new norms.

Some may argue that there are too many categories now, making it difficult for lay investors to make decisions. Rigid mandates would ensure that an investor does not face a situation of a fund label not corresponding to its portfolio.

Retirement Products: Enter the National Pension Scheme

There has been a paradigm change in retirement planning in India over the past 25 years. One, the need for post-retirement financial solutions has increased sharply and new products have emerged to meet the need.

Next, there has been a big shift from defined benefit plans (assured pension from employers) to defined contribution plans (pensions linked to market returns based on accumulations in working years).

A quarter century back, the concept of retirement planning had not quite taken off. The joint family system, while slowly giving way, was still prevalent. This acted as a post-retirement safety net of sorts for many.

Next, a good part of the organised sector employment originated from the government and related entities; these offered assured pensions, post-retirement.

Over the years, with increased migration for jobs and changes in social mores, nuclear families have become more the norm and the elderly are increasingly expected to fend for themselves.

Add to this, the growing life expectancy in the country. Also, the benevolent government’s role in employment generation has been shrinking.

Not just that, in the 1990s, the government foresaw the financial unsustainability of burgeoning assured pensions for its employees. It also felt the need to provide avenues for post-retirement income for a large section of the population working in the unorganised sector.

Retirement products

Enter the NPS (New Pension Scheme, later renamed as National Pension System), a low-cost, market-linked defined contribution product, with options to also invest in equity.

The NPS was an outcome of the OASIS (Old Age Social and Income Security Project) Report of January 2000 that explained the brewing retirement crisis in the country. Despite protests, the NPS was made mandatory for government employees joining in or after 2004.

The product was opened to other subscribers in 2009. The government also introduced an ultra-low cost NPS — Swavalamban model with some contribution on its part for weaker sections in the unorganised sector. In 2013, the Pension Fund Regulatory and Development Authority (PFRDA) Bill was passed in Parliament, paving the way for an effective pension regulator.

Over the years, many mutual funds and insurance companies have also come up with products for retirement planning.

The Employees Provident Fund (EPF) and the Public Provident Fund (PPF) have been around for much over 25 years.

EPF helps employees in the organised sector build their retirement nest through regular monthly contributions and matching contributions from employers.

The PPF is open to all and helps build a corpus for the future. Both the EPF and PPF have generally enjoyed attractive rates of interest and preferential tax treatment (exempt-exempt-exempt). Over the past few years, the EPF has started making some investments in equity too to improve long-term returns.

The government has been trying to push NPS as an alternative to the EPF.

In 2016, it proposed to tax a portion of the sum withdrawn from the EPF corpus on maturity and put curbs on withdrawal of employer contribution before maturity.

But it rolled back these measures in the face of protests. On the other hand, the NPS has been a favourite child.

Many sops have been offered to investors for putting money in NPS Tier I.

Tax break

Budget 2015 provided a tax break of ₹50,000 a year beyond Section 80C. Budget 2016 allowed tax-free withdrawal of 40 per cent of corpus on maturity. Budget 2017 exempted partial withdrawals from tax. Recently, the government exempted from tax the entire 60 per cent of the corpus allowed to be withdrawn at maturity. But that low-yielding annuity has to be bought from the remaining 40 per cent remains a sore point for many.

Insurance: Greater protection for investors

The insurance industry has seen transformation in the last two decades. The constitution of the Insurance Regulatory and Development Authority (IRDA) and the opening up of the space to private players have brought in benefits.

Options for someone looking for a life cover vary from plain-vanilla term policies and traditional endowment plans to ULIPs that offer market-linked returns.

There is also greater flexibility. Insurance buyers get to choose between single and joint life cover and single/limited/regular terms for premium payment. The sum assured can be increased based on milestones in life and additional protection is available through riders for accidental death/dismemberment and critical illness. Premium can be paid monthly/half yearly with option to receive settlement as single pay-outs or annual payments.

But premiums haven’t gone up much, thanks to increased competition and online plans. When policies are sold online, insurers save on agent commission which is passed on to the end customer.

In 2009, Aegon Life (then Aegon Religare Life) launched the first online life insurance policy — iTerm. For ₹50 lakh policy for a 30-year male over a 25-year term, Aegon’s iTerm policy charged a premium of ₹5,600.

For the same cover, offline policies charged a premium of ₹11-12,000. Over the last nine years, however, the premium of life insurance policies has come down further. For a male aged 30, a life insurance cover for ₹50 lakh until the age of 55 costs only ₹3,000-4,000 annually now.

Tightening the noose

IRDA started tightening the rules in 2008-09 as problems began. Insurers were paying very high commission to agents and ULIPs were a racket with front-loaded costs, high surrender charges and mis-selling. Also, policy churns were very high.

In June 2010, the regulator came up with a set of new regulations for ULIPs. The lock-in period was increased from three to five years and distribution expenses had to be spread evenly over this period.

Further, limits were increased for the minimum life cover in ULIPs to 10 times the annual premium for regular plans, from five times earlier. It also specified that the maximum reduction in yield for policies of term more than 10 years shall not be more than 2.25 per cent. Traditional insurance plans saw a clean-up in 2012. To prevent policy churning and incentivise agents selling long-term products, the regulator set the commission in policies — where the premium payment term is 12 years and above — higher than others.

Health insurance

Innovation in health policies started in 2010/2011as new players came on stage. Apollo Munich first offered a zero ‘sub-limit’ in health insurance. Max Bupa, introduced a health plan with no age limit, coverage of new born and sum insured of up to Rs 50 lakh.

Then, slowly, all players in the space began to innovate offering life-long renewability, OPD coverage, sum insured replenishment and so on.

Today, health insurance policies are very comprehensive. Many players, including Aditya Birla, now offer wellness benefits and reward policyholders who maintain good health through lower premium. More recently, health insurance players have also launched indemnity-based critical illness plans with life-long renewability.

Tightening of regulation in the health space happened in 2013. The new regulation set the turnaround time for companies in settling claims at 30 days. It standardised the claim form and pre-authorisation form. Further, it restricted the role of third-party administrators (TPAs).

IRDA also cracked down on the industry’s practice of cancelling the entire accumulated bonus on a policy at the first instance of a claim; it stipulated that cancelling of bonus would take place at the same rat at which it increased. Loading on renewal premiums based on individual claim experience was also barred and it became mandatory to renew the health insurance contract life-long.

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