Uncertainties about sovereign debt and exchange rates have made global ‘fund of funds’ an unviable investment alternative
In one of their clever marketing tricks, fund companies have been suggesting that you should invest in global funds, offering investors the chance for allocating their nest-egg across different geographies. The idea of course is to gather more assets, under the garb of offering you diversification. How many of these funds actually understood the risk underlying such a product? Our guess is very few.
Many things have happened in the western markets in the past few weeks – Goldman Sachs’ alleged civil fraud, Greece’s debt troubles, Icelandic volcanoes and what not. After a period of relative calm and serenity, western markets have again been hit by financial woes. Exchange rates have gone haywire and stock markets have lost sheen. Concerns over Greece’s debt are being shadowed by vulnerabilities in Portugal, Spain and Italy. In such a scenario, would investors be comfortable investing in a fund that invests in global fund offerings? Right time to take a look at how global funds have been doing.
Moneylife has previously written how these funds are mere gimmicks; our advice being - stay away from these funds. First, most of these global funds have exhibited severe underperformance with average returns. For instance, the Principal Global Opportunities Fund has provided a one-year return of 23.36%, when most Indian indices have been up 80%. The Sundaram BNP Paribas Global Advantage Fund has returned just 24.70%. Similarly, the DWS Global Thematic Offshore Fund has returned a paltry 14.82%. The list goes on.
Funds that put your money in other countries presumably offer another round of diversification. That also means you are exposed to all kinds of risks unique to different countries, plagued with their own set of problems. Most shockingly, you cannot even compare how these funds have done vis-à-vis a benchmark. Global funds are pure fads. When the commodity markets are shooting up, fund companies will launch commodity-focused equity funds. When the Chinese market is hot, they will launch a China fund.
Take for example, the Franklin Asian Equity Fund, launched in December 2007, when the Asian markets were hot property among fund managers, what with the abundance of decoupling and other hackneyed theories. Since inception, the fund has given a return of -1.32%.
ULIPs should remain commission based, say insurers, as intermediaries play an important role in selling the product
For a long time now, many have commented and expressed their views that insurance agencies’ big ticket success, unit-linked insurance plans (ULIPs) should be a fee-based model and not a commissioned based model. However, insurers disagree with the view, reasoning that intermediaries play a vital role in selling ULIPs—most of them are sold through relationship models and there would hardly be any change in the cost for the consumer to pay.
“How would the fees be decided? For that matter, how would an employee or agent be motivated to bring in more renewals? It is definitely not feasible,” a top official from Bajaj Allianz said. Most ULIP products are sold in rural and semi-urban areas.
Rajesh Sud, managing director and chief executive officer, Max New York Life Insurance, said that intermediaries play an important role in the selling of ULIPs to potential consumers. A fee-based model would not be fair to an agent, he added.
“Not many understand the risk we live under—either dying too early or living too long, somebody has to help you understand that risk and appropriately help you understand the product,” Mr Sud said.
Life Insurance Council’s secretary general, S B Mathur said a fee-based model wouldn’t work as nearly 80% of ULIPs are sold in rural and semi-urban parts of India and most of these sales are based on mutual relations. “Most of these sales are relationship-based, where it is very awkward for an agent to charge his client for doing his work,” he said.
The argument lies that ULIPs overcharge consumers, through the commission-based model. As per the Insurance Regulatory and Development Authority (IRDA) rules, agents are entitled to get a commission of up to 40% of the premium in the first year, as compared to mutual funds or pension funds.
Regardless of whether the charges are levied on a fee-based model or commission model, the policyholder’s charges would inevitably not be affected, in fact, he might pay a higher amount, Mr Mathur said.
Unlike mutual funds and pension funds, which are no-load products, ULIPs continue to charge high commissions. In August last year, the Securities and Exchange Board of India (SEBI) had removed loads on mutual funds.
Commenting on mutual funds, Mr Mathur said that mutual funds are not yet a retail-based industry, with 80% of funds still being corporate funds. He also said that their level of operations were only limited to metros and urban areas. “So why extend it to an (insurance) industry, which over a 10-year period has created a huge distribution network and where the sale of insurance is predominantly in rural areas,” he asked.
A fee-based model is considered a fair deal for consumers as it enables them to directly evaluate the service an intermediary gives them and it also compensates intermediaries. It gives the consumer the opportunity to negotiate the fees to be paid to agents instead of the charge being embedded in the premium.
In the past, there were reports circulating that consumers who had invested in ULIPs would be free from this commission from April 2011. However, the insurance regulator has decided to maintain the status quo.
The government has found out that certain companies have been selling medicines at higher prices to consumers than those fixed by the National Pharmaceutical Pricing Authority
The chemicals and fertilisers ministry today said that it has issued demand notices for over Rs2,150 crore to various pharmaceutical companies for overcharging consumers, reports PTI.
The government has found out that certain companies have been selling medicines at higher prices to consumers than those fixed by the National Pharmaceutical Pricing Authority (NPPA), minister of state for chemicals and fertilisers Srikant Kumar Jena told the Rajya Sabha in a written query.
“Based on detection of overcharged cases during August 1997 to April 2010, the NPPA has issued demand notices in 746 cases involving an amount of Rs2,150 crore,” Mr Jena said.
Of this, only Rs192.04 crore could be realised till 30 April 2010, leaving a balance of Rs1,958.39 crore. Out of this, as much as Rs1,877.67 crore is under litigation and pending in various courts, he added.
As per the provisions of the Drug Price Control Order of 1995, the government fixes or revises the price of medicines and no company can sell any scheduled drug at a price higher than the one fixed by it.