No commission means no load? Wrong!

In a mutual fund when the great regulator SEBI says that there will be ZERO commission it translates to ZERO load. Which means if you invest Rs. 100 in a mutual fund the full Rs. 100 will get you units and there will be no charges.

However in a life insurance policy let us say you were paying a premium of say Rs. 100,000 and the commission for the agent was Rs. 12,000, Rs. 40,000 was being deducted from your premium as allocation charges, risk premium, etc. After the ZERO load announcement by Swarup (Swaroop) does it mean the whole amount that you paid will get invested. No. Nyet, Illai, Nein………I hope it is clear.

A life insurance companies have a zillion branches (how many do they need is a sensible question which you are not supposed to ask). They have a huge selling cost, they have medical testing cost, infra cost, etc. These costs are incurred by the shareholder (today) to recover it many times over from the policy holder.

So in some form or the other these costs will be recovered from the policy holder. If thanks to Swaroop these expenses cannot be recovered from the policy holder, the breakeven of the life insurance will shift from 2011 to 2101, that is all. So if you hold shares in the companies which have promoted life insurance companies, it is time to buy put options in those companies apart from selling the holdings that you already have. Happy investing!

Looking forward to Swaroop committee’s final report on the compensation of the financial services sales personnel. His long lens of ‘good intentions’ seems almost humoros. Waiting for the financial services industry to react. How a fully pensioned team which may not even have a demat account (but protected by an indexed pension) regulates equity markets, pension markets (which should be the biggest contributor to equity), financial education (with budgets 1/5000th of the financial services industry’s ad budget) will be fantastic blogging material. Watch this space!

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One Response to “No commission means no load? Wrong!”

  1. Dr Mohammed Ali Khan on November 6th, 2009 at 12:54 pm

    “In a mutual fund when the great regulator SEBI says that there will be ZERO commission it translates to ZERO load. Which means if you invest Rs. 100 in a mutual fund the full Rs. 100 will get you units and there will be no charges”
    — But Subra, What about the Asset Management Charges, Which are an average of around 2 % and is recurring every year.. Over a long time frame these AMCs are more costly compared to the Entry or Exit load.

    “His long lens of ‘good intentions’ seems almost humorous”
    —-“The road to hell is paved with good intentions” was a famous quote about communism.. Does it apply here?

    I recently took a Life Insurance ( Term not ULIPS.. Im a Subramoney.com reader now.. they can’t con me ). The agent took away most of my hassles. He came to my house like almost 10 times.. He arranged for the medicals. He came back to give me the policy document.. There was a printing mistake.. He took it back and got it corrected and gave it back to me.. All with the convenience of me sitting in my home. Off duty hours too..in the evening.. Did I mind paying commissions to him.. NOT AT ALL..In fact, I would not have minded paying a little more for the hassle-free services he provided to me..

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