In today’s Finshots, we tell you how a recent ad by an insurance company might just get the Insurance Regulatory and Development Authority of India (IRDAI) to sit up and take notice.

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The Story

You walk into the bank to get some stuff sorted with your accounts. And your relationship manager plonks a leaflet in front of you. It says,

Launching, PNB MetLife Small Cap Fund
₹10,000 invested per month since 2004 in NIFTY Smallcap 100 Index
₹1.1 crores now
Avail PNB MetLife Small Cap Fund @ ₹10 NAV
From 19th Feb — 29th Feb’ 2024

It looks like a mutual fund. It talks like a mutual fund.

So when the relationship manager says, “Think of how this investment could pay for your child’s education,” you don’t actually think much. You fall for it hook, line, and sinker.

But here’s the thing. It’s not a mutual fund. That ad is just a wolf in sheep’s clothing. The product being touted is actually part of an insurance scheme — a ULIP.

For the uninitiated, a ULIP is a Unit Linked Insurance Plan. Think of it as an insurance-cum-investment product. That means you don’t make an ‘investment’ but you pay a premium. And when you pay the premium, of say ₹100, a part of it, say ₹10 goes towards the insurance component and some other charges. That way, if the worst were to happen to you, your family would get a lump sum payout. And the remaining ₹90 gets invested into either the stock markets or some government and company bonds depending on what you choose. And for managing these investments, they charge a yearly fee of around 1.35% too.

Now here’s the deal. Normally, when an insurance company advertises a ULIP, they make it evident that it’s a “unit-linked, non-participating, individual insurance plan”. Or they might even say ‘monthly premiums as low as ₹xx.”

But in this case, there’s really no disclaimer of that sort.

If you ask PNB MetLife about this, they’ll probably say something like, “But, we just want to talk about the new small-cap fund launched by our insurance team. We’re not talking about the insurance product.”

And that’s a fair argument.

The only problem is that you can’t waltz into PNB MetLife’s office and tell them you want to invest all your money into the plan. You can only access it if you buy the ULIP itself. It’s a bundle.

But you don’t see that being highlighted in the ad, do you?

And it’s pretty obvious why they’ve resorted to this sneaky advertising tactic.

You see, small-cap mutual funds had a rollicking time last year. They raked in over ₹41,000 crores of net inflows while their counterparts, the large-cap mutual funds, actually saw a net outflow of nearly ₹3,000 crores. Everyone was chasing returns. If you opened up the website of a fintech selling mutual funds, you’d find these small-cap funds front and centre on their pages. They’d be given 5-star ratings to nudge people to invest in them. Who cares about risks, eh?

And this meant that the mutual fund industry boomed.

You’d imagine the insurance folks wouldn’t want to be left behind, no? So they too decided to tap into this small-cap craze that had gripped Indian investors.

In 2023, for the first time ever, the insurance industry launched a small-cap fund that would be bundled with a ULIP!

Yup, over the previous two decades, insurance firms launched large-cap funds, multi-cap funds, and even mid-cap funds. But for some reason, they’d kept a safe distance from small caps.

And maybe the boom was too big to ignore. So Bajaj Allianz Life Insurance decided it would be the first off the blocks. In May last year, they announced a small-cap fund for ULIPs and in less than a year, the fund already manages ₹1,100 crores. For context, their biggest large-cap fund launched in 2010 manages only a little over ₹4,500 crores.

And once the other insurance companies saw this success. they jumped on the bandwagon and launched their own small-cap funds. With the latest being PNB MetLife.

Okay. But why couldn’t they simply advertise it as a ULIP and talk about its small-cap capabilities, you ask?

Well, maybe it’s because ULIPs typically have a bad rap in the market. Just Google ‘ULIPs Reddit’ and you’ll see what we mean. Most of the discussions are around “bad experience with ULIPS”, “why are ULIPs disrespected so much”, and “mental turmoil because of ULIP”…you get the drift.

Now we won’t go deep into why everyone hates ULIPs. But just know that ULIPs used to be loaded with sneaky charges. The only ones who’d make money were the insurance companies and the agents selling ULIPS. Investors were left high and dry because of these exorbitant charges.

Things have changed over the years but the internet never forgets, no? All it needs is a quick Google search. And the negative news could dissuade any potential investor from buying a ULIP.

So yeah, that’s probably why PNB MetLife chose to masquerade as a mutual fund.

But that’s also the problem. Because ULIPS aren’t mutual funds.

For instance, unlike most mutual funds, ULIPs come with a lock-in of around 5 years. So you can’t withdraw the funds the next year if you feel like it. You’ll have to wait.

Oh, and unlike a mutual fund where you can stop your investments as and when you please, a ULIP doesn’t allow you to do that either. You’ll have to pay your premiums every year till the lock-in period is done. Or else, all the money you’ve paid and accumulated gets transferred into something called a ‘discontinued fund’.

And that’s as bad as the name suggests. Because that small-cap-like return you were dreaming of just evaporates. For instance, a discontinued fund from PNB MetLife has delivered yearly returns of around 5%.

Crazy, huh?

So maybe the regulator should get involved in regulating these sorts of ads. Maybe they should call it out for sneaky advertising that could result in misselling. After all, the ULIP industry won’t want to end up being most hated product in the Indian markets again, do they?

What do you think?

Until then…

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