Who could have imagined a situation where the head of an investor protection body himself is duped by an insurance-related fraud. Sounds shocking, isn’t it? Someone called him up pretending to be from the Insurance Regulatory and Development Authority of India (Irdai) and said that his insurance bonuses would lapse if a one-time payment was not made. Unfortunately, he obliged. To his shock, the head later found out that he had been sold an endowment plan and that he could do nothing about it since the free-look period was over. Sounds strange, but it did happen. After the whole thing was over, the policyholder came to me for advice. I was shocked by the incident but could do nothing as the damage was already done.
If this can happen to a person who heads an investor protection body, imagine the plight of the average Indian. Of course, this person is not the only one in the financial services community to have been a victim to such mis-selling. In my interaction with many financial service professionals, I find that many have been sold wrong financial products.
In a recent global survey conducted by Standard & Poor’s Financial Services LLC (http://bit.ly/1T1EhSw), it was found that 76% of Indians (who participated in the survey) are not financially literate. Personally, I would differ with this number based on my experience and the financial awareness sessions that I conduct; I would peg this number as high as 90-95%. In my opinion, only 5-10% Indians would be good at making sound financial decisions.
In a city like Mumbai, which is considered the financial capital of India, I find that in seven out of 10 cases, investors’ personal finance is in a mess. Most of them don’t know how to decipher monthly statements. They don’t file important documents carefully; nominees, postal addresses, and email addresses are not updated. In most cases, the spouses (normally the women) are not aware about the financial planning done by their husbands, or fathers.
The blame partly falls on the industry, and partly on the investors. The insurance industry has always been busy promoting endowment and whole-life plans, while the mutual fund industry is busy with new fund offers (NFOs), luring investors with dividend declarations, and promoting sector funds (remember the infrastructure fund mania?). The investor, on the other hand, is signing on blank forms without knowing what she is getting into. She has never bothered to do proper due diligence on the distributor or on what is she being sold. This needs to change, and that too at a faster pace.
The good news is that some of these things are changing. When I visited my home town in Assam a few weeks ago, some people there told me that they wanted to start systematic investment plans (SIPs) for their children. I asked them if they knew about investing in mutual funds. To this I got the response that they don’t want to invest in mutual funds, but wanted to start SIPs. When I probed further, they said they are seeing SIP advertisements all over and that made them think about it. The fact that they don’t understand mutual funds, but want to invest in SIPs is a bit worrying.
In my 12 years in the mutual funds sector, for the first time, the industry is getting its thinking right. It is promoting SIPs, which will help investors build wealth in the long term. The SIP model has resulted in unprecedented flows in the system, and for the first time we are able to provide a strong defence to the foreign institutional investor (FII) outflows. According to the Association of Mutual Funds of India, aggregate net inflows across categories increased three-fold in 2015 to Rs.199.61 trillion (till November), while FII net outflow was of Rs.14,212 crore till November 2015. Also, this time around, retail investors did not panic when the market (S&P BSE Sensex) headed south-wards from 30,000 to 23,000 levels. According to a Crisil-Amfi release, mutual funds closed 2015 with 45.9 million folios, of which 43.7 million were retail folios.
