I am inspired by the stand taken by the Honourable Supreme Court in temporarily banning firecracker sales in the National Capital Region (NCR). The idea is to test whether it cuts the deadly pollution levels seen in Delhi during and after the festive celebrations of Deepavali. There is something about the Delhi air and it gets worse with the onset of winters because of firecrackers and also the crop-residue burning in Punjab and Haryana, which too was banned in 2015. It is a different matter that people still burn firecrackers and farmers continue to burn crop residue.
The larger issue is air pollution; just the way the larger issue in the personal finance realm is the availability of a plethora of financial instruments. It is time regulators actually work towards simplifying personal finance, which can be done by limiting the financial instruments than overly regulating them. Take for instance the recent SEBI circular on mutual fund schemes’ categorisation and rationalisation, which was released on October 6, 2017. I feel this is an opportunity loss, where the regulator could have done a lot more.
My understanding of investors, because I am one of them, is that they seek 4-5 outcomes with their investments. They seek savings of their capital with tax efficient returns compared to bank savings. They seek tax savings on investments under Section 80C. They seek growth for the long run, which could be categorised under low, medium, and high risk. Then there are corporate and HNIs, who seek different things under the fixed income head with varying risk and tenures.
Yet, SEBI has mostly gone again with the industry way of defining fund categories. So, we have 10 categories of equity funds, 16 categories of debt funds, and two categories of funds to serve the interests of those seeking retirement savings and those looking to save for their children’s future. There are six types of hybrid schemes and a category each for index/ETF and fund of funds. In all, you have 36 categories of funds; I don’t understand how this simplifies the matter for an investor.
Now, the reasoning for categorisation is to get the fund houses to merge existing funds with overlapping themes or categories. Currently, an AMC because of legacy issues where it acquired the fund schemes of another AMC or introduced funds under similar categories to meet the market demands of an earlier era has more than one fund in several fund categories. This move is expected to bring in some order into the funds on offer with a maximum offering from an AMC being 36 schemes, assuming it has one in every possible category. But does it? If every AMC attempts to offer the full suit, we are looking at about 1,500 schemes to select from.
The very quantum of data can be a big put off for investors to look at when selecting a fund. No matter how much one may shout about Mutual Funds Sahi Hai, this is definitely Sahi Nahi Hai for investors. Now, include the products from insurers – life, health, car, home, travel, and accident – one is staring at several thousand financial instruments to select from. If you include bank deposits, small savings, and loans, we are looking at a big bomb ticking away. Unlike tangible products available on Flipkart and Amazon, financial products are intangible for someone to want to buy them. Yet, there is visible growth in the number of new investors entering the markets.
Drop a bomb
Can the regulators come up with an investor gradation or categorisation instead of product categorisation? Just the way income levels define the tax slabs one falls under, can the same not be used to list out a large set of suitable financial instruments? So, at the lowest tax bracket of 5 per cent, the products available should be term, accident, and health insurance and ELSS under the tax saving umbrella. Likewise, when it comes to loan, ensure the EMI outgo is less than 20 per cent of the income or a band within which it could be set. One could increase the degree of complexity across only four type of taxpayers based on tax slabs and those who are senior citizens.
At the same time, do away with any such recommendation for businesses and corporate tax payers – they have the wherewithal to employ experts to arrive at the best mix of financial products for their businesses. No harm trying this out even for a test group before taking it across everyone. Chances are, instead of addressing an incremental pollution problem because of one night’s pollution, we may have a long-term solution to air pollution. Yes, in the financial world, we will continue to have Ponzi schemes, just the way there are those miscreants who defy bans on firecracker sales or farmers who continue to burn crop waste.
Unless something drastic is attempted, we will continue to try to simplify complex financial instruments in a short-gap manner. This is akin to the Delhi government experimenting with odd-even formula. The stats on pollution level during the odd-even experiment were not conclusive, but the traffic congestion did make roads a pleasure to drive on. Yes, even then smart Delhi-crowd managed to survive on two number plates and other innovative ways to work around the system, but for the larger segment, the easing of traffic was a desired boon. The lesson for financial regulators – think from the investor’s perspective and not from the product manufactures.