The government ordinance on the life insurance business has ruffled up mutual fund houses. Echoing the industry’s resentment, a CEO of a large fund house asked, ?Why are we being given a step-motherly treatment?? However, fund houses are grudgingly coming to terms with the fact that two competing products are being treated in different fashion.
?We welcome these steps and the institutional mechanism (with various market participants) to address common issues and ensure that competitive products co-exist with healthy competition among them,? said AP Kurian, chairman of the Association of Mutual Funds of India (Amfi). On Friday night, the government had issued an ordinance, saying that the life insurance business will include any unit-linked policy or scrips or any such instruments. MFs have been hit by recent regulations of Sebi to ban entry loads, while none such exist for Ulip products. After August 1, 2009, there has been an outflow of Rs 7000 crore.
?After removal of entry loads, the commissions have clearly reduced,? said Alpesh Shah, partner and director of Boston Consulting Group. Usually, the industry practice is to pass on the entry load collected from investors to distributors as commissions. He added that now mutual fund housess are compensating for it from their own pockets.
The greater worry for the MF industry is the shying away of a large component of the distribution channel, the Independent Financial Advisors (IFA), who numbers stand at one lakh and contribute 29% of the overall assets of the mutual fund industry.
?Some of the small IFAs (many of whom are part-timers) are at risk of running out of business,? said Shah. He reasons that today large IFAs (with Rs 1 crore and above of assets under management) constitute bulk of the IFA assets. And if these small IFAs are not nurtured, there will no large IFAs in future. If that happens, it would be an advantage for life Insurers.
Private life insurance players started operating in the country seven years after the first private mutual fund was incorporated. Yet, life insurers are far ahead on following metrics ? agents, branches and employees. While there are close to a lakh agents for mutual funds, it is 29 lakh for life insurance companies. Mutual funds in all have 17,000 employees, while life insurers have hired 250 times that number.