Debasish Panda, the Chairman of the Insurance Regulatory and Development Authority of India (IRDAI), has supported a proposal to allow insurance companies to sell mutual funds.
Due to the interconnected nature of the financial services industry, IRDAI believes a one-stop solution would enhance accessibility and availability of financial services. It will also contribute to financial inclusion and promote greater access to a wide range of financial products and services.
It aligns with a finance ministry proposal to explore allowing insurers to offer a range of financial products, including mutual funds. In the past, insurance companies had introduced products similar to mutual funds. Earlier, we had bancassurance, banks selling insurance, but that, too, has pros and cons.
Currently, insurance companies can launch schemes that invest in portfolios resembling traditional mutual funds. If the latest proposal becomes a reality, it will have several pros and cons.
Convenience: Customers can access mutual funds through the same platform or provider they already have insurance policies with, making it convenient to manage their investments in one place. Customers would benefit from streamlined communication by having a single financial adviser or agent who can address their needs across multiple financial touch-points. This centralized approach simplifies the customer experience, allowing for efficient and effective communication with a dedicated professional who can provide guidance and support.
Lower Costs: Furthermore, insurance companies selling mutual funds can potentially benefit from lower operational costs. Costs reduction could result from economies of scale as insurance companies have a large customer base and a wide existing network
This cost optimization has the potential to translate into more affordable solutions for customers, resulting in increased accessibility and cost-effectiveness of financial products and services. They can also use shared resources such as back-office support, customer service centers would also lead to cost efficiency/
Familiarity & Trust: Existing insurance customers may already have a relationship with the insurance company, which can provide a level of familiarity and trust when considering mutual fund investments.
Financial Planning: Insurance companies offering mutual funds may have financial planning tools and resources to help customers make informed investment decisions and align their investments with their overall financial goals.
However, as mentioned there are some cons too.
Limited Options: Insurance companies may have a limited selection of mutual funds available compared to dedicated mutual fund providers. This can restrict the choices for customers who prefer a wide range of investment options.
Potential Bias: Insurance companies may promote their own proprietary mutual funds or funds from affiliated companies, which may not always be in the best interest of customers. This could lead to potential conflicts of interest. In then case of bancassurance, there has been instances when bank executives have sold ULIP policies to senior citizens with the promise of fixed returns.
Lack Of Specialization: Insurance companies primarily focus on insurance products, and their expertise in managing mutual funds may not be as specialized as dedicated asset management firms. Customers may miss out on the expertise of specialized mutual fund managers.
