Well this is not an article on Exchange Traded funds, but there is a link at the bottom which will take you an ETF article.

The financial services industry (like all other industries) is very smart. Highly qualified people – from CPAs, CAs. CFAs, engineers, PhDs…..have to be kept intellectually occupied and financially happy. To do this we cannot have simple products like term insurance, SIP, Exchange traded funds, ETF, index funds. Simply because if the product is simple many smart brilliant people outside of this industry will not buy it! L O L.

The customer also needs esoteric products (which 99% of them do not understand in full) – and when they write to me they say ‘the agent sold me this plan’. It is NEVER ‘I did not pay attention to what shit I was signing’.

Be that as it may. Let us see how the industry complicates products. Take a hypothetical case of me telling a customer

– do a SIP and buy a Term insurance plan.

The client goes and buys a ULIP named ‘Safe Investment Plan’ or ‘Super Investment plan -children’ or ‘Superior Investing plan’…and for a minute you can be sure that all these are some kind of a unit linked plan. Obviously these are sub-optimal or blatantly badly priced product which the client can buy. High time Irda and Sebi stopped being indulgent. Look at the great Sebi not bothered about ‘MIP’ – Monthly Income Plan named to confuse people and get some money meant for the post office.

Come to the next ‘simple’ product called Term insurance. The immediate thought is to say ‘how can anybody complicate this?’ Well well when you pay a few million rupees to a few rank holding accountants or engineers, they can complicate mother’s milk!

So here it goes. There is a product called ‘Term insurance with a return of premium’. Let us say the term insurance premium for a person of age 30 is Rs. 9000 for a sum assured of Rs. 1 crore. It is easy to design a product called ‘Term Insurance with return of premium for a Rs. 14,912 per annum premium.

Obviously the client will say ‘but this is more expensive’. So the sales spiel is ‘Sir, in term insurance you LOSE all the money if you survive. However in ROP product, all the premium that you pay is returned to you’. It hits home most of the time. If this does not hit home there is another line – ‘Sir, in an ordinary term plan if you do not pay one premium it lapses, where as here it does not lapse, because there is some accumulation of yours.’ Another fantastic sales ploy and it works.

Is it a good product? No, nein, nyet, …not using the Indian languages or I could have added a few other NOs.

Why is this a bad product – simply because for getting the money back you are paying a higher price, and the money coming back is hardly an incentive to stay on. The reason for buying a term insurance is because you have a liability to pay or a goal to be fulfilled. What happens when the liability is over or the goal is reached?

What do you do if a competitor comes out with a new Term plan at much lower rates?

You throw away the term plan. Can you throw away the ‘Return of Premium Plan’ NO. NYET. NEIN…

The other cruel variation of the regular term plan is of course the ‘One- time term plan for 25 years’ kind of a product. This premium is much higher and is added to a housing loan and you pay it on a monthly basis (including the interest on it!).

So much for simple ‘SIP’ and a simple Term plan.

So you research more and say ‘Subramoney is very, very negative…he only criticises, let me buy a simple ETF’. Fair enough…read the link….and then come again to the blog….have fun…and have a great day!!

http://www.economist.com/node/18864254?fsrc=scn/fb/wl/ar/toomuchofagoodthing