Winning back the aam investor

This has permanently damaged the faith of the middle class investor in such schemes. The financial services industry has no idea how much psychological damage it has caused to the investor psyche. It will take a long time to recover, and fostering a culture of long-term investment in insurance and pension products linked to market investments will take some years.

The finance minister, last fortnight, publicly admonished insurance companies for large-scale mis-selling of insurance. The insurance regulator, IRDA, has reported massive complaints of unfair business practices by those marketing these financial products, which have risen from 7.6 per cent of total customer complaints in 2009-10 to 32 per cent in 2011-12. This has been happening even in conventional insurance policies after severe curbs were placed in 2010 on unit linked insurance plans (ULIPs), which were nothing short of a scam. Even banks had been regularly advising their savings and fixed depositors to move their money to ULIPs and other market-linked pension products designed by their insurance arms. Is there a conflict of interest there? No wonder fresh premiums in unit linked insurance schemes have collapsed from Rs 60,000 crore in 2009-10 to a mere Rs 17,382 crore in 2011-12.

I am elaborately describing the plight of the middle class saver simply to illustrate how irresponsible financial services institutions, aided by lack of regulatory intervention, have destroyed the small investors' confidence at a time when the economy badly needs to channel much higher long-term savings into productive sectors such as infrastructure. Instead, the middle class, hurt by both inflation and unfair practices by financial services institutions, is buying more and more gold.

Imagine buying additional gold worth over Rs 1,00,000 crore a year, which cannot be channelled productively into the economy. If the same money were invested in safe and secure — and honestly sold — financial instruments, it would be funding the long-term infrastructure needs of the country.

... contd.

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