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Capital guarantee funds
It is an equity mutual fund with an upside, but very little downside. In English this means: If you had Rs 100 to invest in the stock market through the mutual fund route and did not want to lose this money, while getting the growth that the stock market gives, you will buy this fund. Your Rs 100 is protected (after a lock in period) but if the market goes up, say by 10 per cent, your money also grows by 10 per cent. But if the market falls by 10 per cent, your money does not lose value. This product is for the risk-averse investor who wants some growth with very little risk. Your risk: inflation eating into your principal.
Commodity mutual funds
Today you can buy only equity or debt products through a mutual fund. Once Sebi shows the green signal, you could begin diversifying across one more asset class – commodities. A part of your portfolio could be invested in say a gold mutual fund to give the inflation indexed returns of gold, to give your overall portfolio better diversification.
Pension product, the Indian 401 (k)
Your retirement planning will get a new dimension after India launches the 401 (k) kind of products either in 2005 or 2006. You will have the option of choosing between three funds – low, medium and higher risk with zero, small and larger exposure to equity respectively. These will be managed by insurance companies or mutual funds and will be portable across jobs and work locations. Called tax-deferred, these products don’t have any tax on the money you deposit each year, the appreciation over the years is tax free and when you withdraw (usually at retirement with you are in a lower tax category than today) you pay tax only on the amount that you had deposited and not the full amount that it has grown to. If you had put in Rs 10 lakh over your employment years and it grows to Rs 50 lakh, you pay tax on only the 10 lakh.
Disability insurance
We don’t yet have insurance products that protect against disability arising from disease or illness, it is only an accident insurance that covers against temporary or permanent disability. Statistics show that there is a much higher chance for a person to get disabled than die. Death sometimes costs less than disability, which needs money for the treatment and care. Products that protect against disease or illness initiated disability like paralysis, muscular dystrophy or polio, are on their way.
Universal life insurance
Metlife has just launched the first of such products that is a mix of a term life insurance (the cheapest life insurance you can buy – biggest cover for the smallest premium) and a savings deposit. Apart from being covered for death, the product allows you to accumulate money with a minimum rate of growth of 3.5 per cent, same as a savings deposit. The upside is, that when interest rates rise, so does the return on this product. It is a flexible product that can be scaled up or down as insurance needs change over the time.
5 products and innovations to look out for in the next few years
No load funds
Mutual funds charge about 2.5 per cent today as distribution costs when you buy a mutual fund. That means the commission of the agent comes from the ‘load’ that you pay. What if you wanted to access the mutual fund directly, without the agent? Or though a fee-only financial planner who will not charge you the commission for selling the product? Today you have no option but to keep paying this load, but planners are pushing to get no-load funds introduced in India that work in favour of the customer. That is you.
No load insurance
Same thing, but for insurance. The need to have no-load insurance products is even more pressing since the costs are much higher. Upto 30-35 per cent of your first premium goes to the agent as his commission and the subsequent per year costs are between 5 to 10 per cent. A no-load insurance product could get you a bigger coverage for the same premium or reduce your premium for the same cover. It would need a change in the Insurance Act to make this happen.
Real estate mutual funds
These are still two years away, though Real Estate Investment Trusts (REITs), venture capital funds that invest in property, are expected to start in 2005. This will open one more asset class to diversify your portfolio at the retail level.
Cost of living indexed products
The one problem with a risk free fixed deposit is that it may end up giving you a return that reduces your purchasing power, if inflation rises rapidly for even a few years in the accumulation period. Inflation indexed bonds are a solution to this problem. Not yet here, but are needed to give conservative returns that keep the purchasing power intact.
Better disclosure on costs of financial intermediaries
Though the disclosure rules are fairly transparent in mutual fund products, disclosure in insurance leaves much to be desired. With Eliot Spitzer in the US poised make insurance give better disclosures and be more transparent, as he did to mutual funds, the Indian companies too should reflect this change.
