The capital market regulator, the Securities and Exchange Board of India (Sebi), has once more moved in investor interest in the mutual fund industry. The mutual fund you buy will soon cost less, be less prone to mis-selling and be more transparent. These are the four changes that will make an already investor friendly product go several steps ahead.
One, Sebi has lowered the costs in a mutual fund. An expense ratio in a mutual fund is the cost that the investor pays. The regulator fixes the maximum a fund can charge and leaves it to competition to drive costs down. Levied on the assets under management (AUM), these costs were fixed in 1996 when the industry size was around ₹30,000 crore. Costs in a mutual fund were expected to come down as the size grew because fixed costs do not grow with the size of the AUM. The benefits of larger size, it was assumed, would be passed on to the investor. The industry size is now ₹25 trillion but the costs in the retail part of the market have stayed near the maximum limits; in the institutional part (liquid funds and debt funds), costs have been slashed due to the higher bargaining power of the big customers. Retail customers have no organised voice and continued paying more even as the size of the industry indicated a cost cut. Sebi has now cut the maximum a fund can charge and costs over the board will come down.
It is scary to see your life’s investment shave half its value in a free fall in stock prices. Indian stock market investors saw such an episode starting January 2008. If you had ₹1 crore in an index fund linked to the Sensex as on 9 January 2008, by 9 March 2009, its value was down to just under ₹41 lakh. It is gut wrenching no matter how strong your stomach for risk is. The whole time over the year you were driven by sheer panic to sell as the signals about an imminent global financial crisis caused markets to teeter on the edge and periodically belch out another giant fall in stock prices. Some brave hearts held on to their investments during the bloodbath, married as they were to “long-term” investing. By 4 November 2010, they saw their money recover as the Sensex regained its 2008 peak. The market since has given an 8% average annual return. Who are the people who came out on top and what did they do right? A decade, and nearly another 20,000 points on the Sensex later, there are three lessons that we, as retail investors, can draw from the North Atlantic Financial Crisis that had a trigger point when the $639 billion multinational behemoth Lehman Brothers went bankrupt on 15 September 2008.
Both anecdotes and data seem to suggest that Indian health insurance polices that are bought by us as individuals don’t pay up as much as they should. As we listen to the stories of our friends and family about the run around given by hospitals and medical insurance firms to pay up claims of a hospital bill, we quietly send up a prayer—please let me not be the one whose claim is rejected if I ever need to use my policy. There is increasing distrust in the medical insurance market for privately bought covers. Covers bought by corporations, called group covers, seem to have less problems of claims getting rejected.
The anecdotes are supported by data. A May 2018 working paper, titled Fair Play in Indian Health Insurance has done a deep dive into the sector. The big findings are two. One, claims are not paid as much as they should be. Two, India has the highest complaints rate when compared with other countries.