The India Watch

IRDA Wants To Let Insurance Companies Sell Mutual Funds—Here Are The Benefits And Drawbacks

The chairman of India's Insurance Regulatory and Development Authority (IRDAI), Debasish Panda, has backed a plan to let insurance firms to provide mutual funds for sale.

IRDAI thinks a one-stop solution will improve accessibility and availability of financial services because of the interconnectedness of the financial services sector. Additionally, it will encourage wider access to a variety of financial goods and services and help with financial inclusion.

It is consistent with a suggestion from the finance ministry to look into enabling insurers to provide a variety of financial products, such as mutual funds. Insurance firms have previously launched mutual fund-like products. In the past, banks sold insurance; nevertheless, this practise also had advantages and disadvantages.

Insurance firms are now allowed to introduce programmes that invest in portfolios that resemble those of conventional mutual funds. There are a number of benefits and drawbacks if the most recent suggestion is implemented.

Convenience: Customers may manage their assets in one location by using mutual funds via the same platform or provider they currently have insurance contracts with. Customers would have simplified communication if they had a single financial advisor or agent that could take care of all of their financial issues. The client experience is made simpler by this centralised strategy, which enables effective and efficient connection with a committed expert who can provide direction and help.

Reduced expenses: Insurance firms that market mutual funds may also profit from reduced operating expenses. Due to the size of their client bases and established networks, insurance firms may be able to reduce costs via economies of scale.

As a consequence of this cost optimisation, clients may be able to find solutions that are more inexpensive, increasing the accessibility and affordability of financial goods and services. They may also use pooled resources like back-office assistance and customer service centres, which would save costs.

Trust and Familiarity: Existing insurance clients may already have a connection with the insurance provider, which may provide a degree of comfort and confidence when thinking about investing in mutual funds.

Financial Planning: Insurance firms that provide mutual funds may include tools and resources for financial planning that may assist consumers in selecting investments that are in line with their overall financial objectives.

As was previously said, there are also some drawbacks.

Compared to specialised mutual fund providers, insurance firms may only provide a small number of mutual funds. Customers that desire a broad variety of investing alternatives may have fewer selections as a result.

Potential Bias: Insurance firms may push their own proprietary mutual funds or funds from related businesses, which may not always be in their clients' best interests. Conflicts of interest may emerge as a result. In the case of bancassurance, bank officials have on occasion offered fixed returns while selling ULIP plans to older residents.

Lack of Specialisation: Insurance companies' competence in managing mutual funds may not be as specialised as that of specialised asset management organisations since they concentrate largely on insurance products. Customers may not benefit from specialised mutual fund managers' knowledge.

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