The Sensex is riding high at 17,000-plus despite fears of a contagion in the euro zone following the economic crisis in Greece. India Inc continues to churn out fairly decent numbers; even if there is a base effect and commodity inflation, the numbers are good. More importantly, with a bit of luck and a good monsoon they?re likely to stay that way. And with GDP growth estimated at 8% over the coming years, the Indian economy is gathering momentum. So why are retail investors staying away from the stock market? The month of April has once again seen money moving out of equity schemes; in fact, over the last year equity schemes haven?t seen money inflow, except for probably two or three months. At a time when total assets for the mutual fund industry are at a new high of $182 billion, most of the money is flowing into fixed-income plans. As Morgan Stanley points out, equity assets, at just over $47 billion, account for 3.4% of the country?s market capitalisation and are 18% below the December 2007 peak.
Clearly, the end of commissions to agents, which happened last August, is hurting business. One fund house recently collected a paltry Rs 4 crore for a new scheme and it?s only those fund houses that have the distribution power of a bank behind them that are able to get people to invest. While mutual funds are the best option for small investors, they remain a push-product and so agents won?t sell them unless they make money in the process. This is why small savers have bought into Ulips, though, in the process, agents have pocketed big commissions. But while there has been a lot of misselling and commissions have been usurious, agents do need to be compensated.
The Sebi-Irda spat has raised concerns that commissions on Ulips may also be reduced to near zero. This may not be such a good idea. The huge corpuses with life insurers have found their way into the stock market and these domestic savings are now a big pool that companies can tap into. In 2009-10, insurance firms are understood to have bought more than Rs 60,000 crore (about $13 billion) worth of equities. And in another year or so, investments by life insurers are expected to match the flows of foreign institutional investors. In 2009, FIIs brought in some $17 billion into the country and if Ulips continue to be bought the way they are today, it?s possible that fund managers at life insurance companies will be buying stocks worth about $15 billion this year.
If that happens, it will dramatically change the way the Indian stock market works. Ever since FIIs were allowed into the market way back in the early nineties, they have held sway; every now and then, UTI and LIC were summoned by the government to either bail out the market or some PSU issue. But investors have never dared to take their eyes off FII flows and have always tracked what stocks they?re buying. This dominance of FIIs over the Indian market can change if insurers continue to get money the way they are today. This pool can balance FII inflows, which can be volatile. If India wants a market capitalisation of $2 trillion or $3 trillion, we must find a way to tap household savings. As it is, the share of household savings in equities is minuscule.
But life insurers will not collect the kind of premiums that they are getting today unless agents get paid. Ulips, too, are push-products and while the added comfort of the insurance cover may be a ?pull? factor, the fact that most of the premium is invested in equities rather than in fixed income products, shows that people are looking to punt. Since the country?s demographics are such, the universe of savers is getting younger and that helps because youngsters are both able and willing to take more risk. So while agents should not look to fleece investors as they have been doing?the industry is estimated to have collectively earned around Rs 15,000 crore?they are entitled to commissions. Elsewhere in the world, commissions may be smaller but they exist and there?s nothing wrong with investors paying for a service. Sebi?s idea that investors should decide how much to pay is all very well but probably a little ahead of its time. According to one report, the finance minister wants to follow a ?no load fee model? for the entire financial sector, but it may not be the best way to go about it. If he thinks this will protect small investors, he is mistaken. For sure, agents are not saints; they are guilty of misselling and forcing clients to churn portfolios unnecessarily. But individuals need to be alert, too. Agents can play a useful role in channelling household savings into productive expenditure and while the amount of the commission can be reasonable, agents too need to make a living.
shobhana.subramanian@expressindia.com