Mutual funds and insurance products have long attracted household savings, helping individuals create long-term wealth and ensure financial cover for loved ones.
Soon, you will also be able to invest in the shares of these companies, as several are expected to come out with initial public offers (IPO). This opens up an entirely new segment for investors.
However, you need to know what is on offer. Both sectors offer a direct play on the recent shift in household savings from physical assets like gold and property to financial assets. Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital, says, “The shift in money flows towards financial markets will only accelerate in coming years.”
Mutual fund and insurance segments are growing fast
AUM of mutual funds and new business premium of insurers are rising each year.
Non-life insurance (Gross direct premium underwritten)
2013-14 : Rs 69,833 crore
2016-17 : Rs 1,27,212 crore
Life insurance (New business premium)
2013-14 : Rs 1,19,641 crore
2016-17 : Rs 1,75,022 crore
Mutual funds (AUM)
2013-14 : Rs 8,25,240 crore
2016-17 : Rs 17,54,619 crore
MF AUM data as on March end. Life & non-life insurance figures for Apr-Mar period Source: AMFI, IRDA
However, experts reckon mutual funds are likely to get a larger share of the pie, making asset management companies (AMCs) a better investment opportunity than insurance players. Two fund houses—Reliance Nippon AMC and UTI AMC—have announced plans to list this financial year.
Why AMCs have an edge
The mutual fund industry in India is still in the nascent growth phase, attracting less than 4% of the population’s savings. Experts feel the industry’s untapped potential is huge. Assets under management (AUM) of the mutual fund industry has nearly doubled in the past two years, from Rs 10.84 lakh crore in 2015 to Rs 19.03 lakh crore in May 2017.
Demonetisation has also accelerated the shift towards financial savings with industry assets seeing a significant jump since October last year. Feroze Azeez, Deputy CEO, Anand Rathi Financial Services, says the participation in mutual funds is likely to go up exponentially in the coming years given the huge spend on investor awareness. “AMCs are great compounding businesses, as there is embedded growth in its assets from the performance of underlying capital market investments. Many of the larger AMCs have already reached a critical mass to benefit from this growth,” he says.
Gupta reckons there is far more certainty in the mutual fund business, particularly for established players. The profitable fund houses will keep on growing. For a mutual fund company, growth in asset size is critical to drive its income, which is primarily in the form of fund management fees. These are charged as a certain percentage of the assets managed by various schemes. Reputed funds companies with a healthy track record are able to garner a higher share of investor money, and thus grow their fee income.
The mix of assets in the mutual fund company’s portfolio also determines how profitable it is. Equity and equity oriented funds charge a higher percentage as fee. These are mostly subscribed by retail investors and are considered stickier—the fund is able to hold on to the assets for a longer time. Recent industry data shows investors are staying invested in schemes for a longer period of time.
Opaque structure dogs insurers
The insurance industry too is on a high growth trajectory. Like mutual funds, insurance penetration in India is very low, which offers a lot of growth potential for insurers. The total new business premium of life insurance companies touched Rs 11,801 crore in May this year compared with Rs 10,610 crore in May 2016.
Private players in particular are clocking impressive growth, along with an increase in ticket size of policy. Yet, compared to mutual funds, insurance companies provide lesser clarity on operations. “The customer base in insurance is far more fickle, which is visible in the poor persistency ratios,” argues Gupta.
Premium collections are the lifeline for insurers. Hence, growth in new or first year business premium is the best indicator of the health of an insurer. It indicates the premium earned from new policies acquired by customers during the year. The insurer’s persistency ratio is another key indicator of its sustainability. This ratio shows the proportion of policyholders who continue to hold on and pay the premium after a certain period of time.
Latest figures show persistency ratios among many insurers remain poor. Experts argue that pricing of risk for both life and non-life plans remains a grey area and can potentially leave insurers exposed. Deepak Shenoy, CEO, Capitalmind, reckons Indian insurance companies are far too overvalued. “The valuations quoted by Indian insurers as indicated by the embedded value multiples are expensive given the relatively small size and limited years of existence,” adds Shenoy.
Another argument in favour of mutual fund companies is the low capital requirement; they can scale up without pumping in more than the minimum capital prescribed by the regulator. Insurance companies are forced to bring in more capital as their risk exposure rises. ICICI Prudential Life got listed on the exchanges last year, becoming the first insurance firm to do so. Reliance General Insurance, ICICI Lombard and state-run New India Assurance and General Insurance Corporation of India will be among the non-life insurers to bring out their IPO this year. HDFC Life Insurance may also become a listed entity if its merger with Max Life is complete.