The Economic Advisory Council to the Prime Minister of India (PMEAC) has strongly recommended increasing the attractiveness of life insurance and mutual fund schemes to limit Indian investors’ appetite for gold.
It has specifically said that such financial products should be made at least as attractive as was the case till March 2010.
According to sources in PMEAC, the council’s inspiration was a recent McKinsey report that pitched for new financial products deriving from illiquid assets such as gold and real estate. Such products can offer low-cost investment avenues with greater transparency. Besides, they also open new vistas for financial firms.
In its report, the PMEAC said: “The import of gold forms a large component in overall imports and variation in this element accounts for a very sizeable component in the change in the current account deficit.†The best way to limit the appetite for gold is to “work towards making other kinds of assets more attractiveâ€, it said.
The changes in the regulatory framework in the last two years, both by SEBI and IRDA, changed the dynamics of the insurance and mutual fund businesses. In August 2009, SEBI banned the entry load on mutual funds and did away with agents’ commission. IRDA followed next year and cut the commissions of insurance agents by a third.
PMEAC sources clarified that it was not advocating a return to the high-charge ULIP regime or reverting to the old practice of high commissions. “We want fiscal incentives for mutual funds and life insurance products,†an official said.
Alok Kshirsagar, Senior Partner, McKinsey India, said a mere 5 per cent shift in annual flows would be worth Rs 55,000-60,000 crores in five years. For instance, in Japan and China, banks offer recurring deposit savings products with every month’s contribution being used to buy gold at prevailing prices.
“This allows dollar-cost averaging. It is simple, liquid and offers returns similar to what investment in physical gold will fetch,†he said.
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