Why ULIP mis-selling has become rampant ?
Why is there so much mis-selling of ULIP? How to avoid this mis-selling? Who should take ULIP?
HDFC Asset Management Company’s Chairman, Deepak S Parekh said that the Indian mutual fund industry has the potential to grow exponentially. While addressing the shareholders, he said that the year gone by will go down in history as one of the most difficult ones experienced globally. Rarely is there a catastrophe that is shared by the entire world at the same time. There were unprecedented setbacks due to Covid-19, which resulted in the global economy witnessing one of the worst contractions. The Indian economy too, contracted by 7.3% in FY20-21 – an event not witnessed since the liberalisation of the economy.
The second wave of Covid-19 has been significantly higher than the first one and impacted the growth recovery that was underway since the last quarter of FY2020-21. While there is a rising concern of impact on consumer sentiments and whether the recovery will be as quick as last year, the fast pace normalisation will happen as the economic activity stabilises.
Parekh added that a substantial proportion of the population will be vaccinated in India by the end of this year which is likely to support the rebound. On a full-year basis, the overall economic impact is not likely to be material provided Covid-19 related situation does not deteriorate significantly from hereon. The healthy investment growth in Q4FY21 and the thrust of the central government to push capital spending through higher budgetary allocation and improving access to infrastructure financing should also aid the revival. Overall, he believes that growth is likely to be strong in FY22 on the back of a favourable base effect, supportive fiscal and monetary policy and buoyant global environment.
Industry performance in the background of Covid-19
The mutual fund industry overall assets under management (AUM) rose by 41% year on year to close at Rs 31.4 lakh crore. Over the last 5 years, mutual fund industry asset under management (AUM) has seen a CAGR of 20.6% and equity-oriented AUM has grown at a CAGR of 25%. Despite the high growth, India’s mutual fund AUM to GDP ratio remains significantly low at 15%, as compared to a global average of 75%. Similarly, equity AUM to market cap stood at 5% as against a global average of 30%. India’s penetration levels by any measure remain considerably lower compared to other large economies. India has more than 50 crore income tax permanent account numbers (PAN), but only 2.2 crore mutual fund investors.
This reaffirms Parekh’s belief that the industry has the potential to grow exponentially. He says, “Sebi has done a commendable job not only in terms of regulating the industry but also aiding growth. Global agencies admire India’s mutual fund regulatory framework and consider the mutual fund industry among the top in terms of global best practices. I hope we can capitalise on this and make our domestic mutual funds accessible to international investors. The recent regulation in terms of aligning the interest of key employees with unitholders of the mutual fund schemes is a step in the right direction. I am told that this kind of regulation does not exist even in the developed world and I hope that they follow us when it comes to the regulatory environment. The regulator has been requested some modifications to the circular.”
Parekh’s view on the same would be to allow more flexibility to employees to select a set of schemes they would want to invest in based on their own risk profile within this limit of 20% as set by the regulator. Various mutual fund products have been created keeping in mind the needs of different kinds of customers.
For example, liquid and overnight funds are meant for large corporate treasuries or investors with short term surplus while at the other end sectoral or thematic funds are meant for customers with a higher risk profile or to implement a tactical view. Let the key employees decide on their own risk profile and allocate in respective schemes. Also, the regulator has been absolutely fair in terms of computing 20% limit post deduction of mandatory retiral funds and tax. He also mentioned that he would like to request the regulator to also consider mortgage payments as part of deductions. Mortgage payment tends to be a material amount especially for younger employees.