The last couple of years have seen a flurry of regulatory changes affecting the various Indian investment products. These changes are sure to impact all of us. So it is essential for you to understand what these regulatory changes mean for you. Here are some of the major changes impacting various investment products.
Regularization of ULIPs
- Reduction of charges: Before the ULIP charges were capped, the insurers charged exorbitant charges on these products. Hence it took a long time for the recovery of these charges. But now IRDA has put a limit on these charges. This means you can recover your charges more quickly.
- Spreading out of charges over the policy term: Previously these charges were deducted during the initial 3-5 years of the product. As a result, your corpus decreased significantly. But now, the final amount goes up significantly, as more amount is invested initially.
- Hike in lock-in period: The the lock-in period for these products has gone up to 5 years from the earlier 3 years. This is a very important change as equities tend to give better returns over a long period, and most ULIPs are equity-based products. So you tend to get higher returns.
- Guaranteed return on pension scheme: The pension schemes from insurance companies are now set to offer you a guaranteed return of 4.5%.
- Limitation on surrender charges: With this move, you will get higher amount, if you decide to surrender your policy prematurely.
Revised guidelines for PMS
- Minimum investment for PMS to be fixed at 5 lakhs: Previously, PMS managers would accept clients even though they couldn’t invest Rs 5 lakhs. But with this new SEBI circular, the minimum amount for PMS account has been fixed at Rs 5 lakhs.
- PMS Managers to charge fee only on the excess profit generated: SEBI has said that the PMS Manager can charge their fee only on the excess profit generated over the previous year. E.g. if you invest Rs 5 lakhs, which after a year becomes Rs 8 lakhs, then you pay fee only on Rs 3 lakhs and not on the entire corpus. This saves you money in the long run. Moreover this fee will be levied at interval exceeding a quarter. This will safeguard your returns.
Abolishment of entry loads in mutual funds
- This means lesser churning, fewer NFOs and no mis-selling. It means investors gain.
Want to invest in equities? Then you can invest in them either directly or indirectly. When it comes to indirect investment, you have two options: mutual funds and portfolio management service (PMS). Let us understand more about PMS and see if it right for you.
What is PMS? PMS is a customized investment service offered to big investors, who have a lot of money to invest. There is a fund manager to look after each PMS account. You give him a restricted power of attorney to invest money on your behalf. The investment is made on your behalf after taking into account your investment objectives, time frame and risk appetite. So a portfolio of a 28 year old with a small child, looking to build corpus for his child’s education is quite different from the portfolio of a 55 year old man looking to build retirement corpus.
Pros: Here are some of the advantages of PMS.
• Customized asset allocation: The portfolio each investor gets is determined by his risk tolerance level, duration for which you intend to remain invested and why you want to invest. E.g. if you want to invest your money in order to purchase a house within 2 years, your asset allocation will comprise mostly of debt instruments. But if you are planning to invest for your 2 year daughter’s marriage, you are most likely to get equity recommendations.
• 24×7 access: Most PMS service providers let you view your account online. You can analyze the performance of your investments and get information on your capital gains, booked/un-booked gains, updated value of your investments etc.
• Tax efficiency: The fund managers manage your investments in such a way so as to reduce your tax liability.
• Qualified fund managers: Most PMS services are run by professional fund managers who are experts. Thus you can rest assured that your money is in safe hands.
• Reduces your responsibility: You don’t have to spend time looking after your portfolio. Your fund manager is there to look after it and take decisions that will benefit you.
Cons: PMS also has its own share of drawbacks.
• Inability to compare the performance of fund manager: As most of the PMS services are not regulated, it is difficult for you to tell which fund manager has given you the best performance.
• Expensive: PMS managers charge a flat fee + a certain percentage of profits made by your investments. Usually it is the profits that make up the larger portion of the fund manager’s charges. This can work out to be expensive for you in long run.
• Not suitable for expert investors: If you have time and have good investment experience, then PMS are not for you. However for that you need to be emotionally detached. If not, then PMS is your best bet.
Is it for me?: Yes, if you have lot of money and not able to detach yourself emotionally from your investments and have no time to research before investing.