'Long-term investments without tax sops don't do well'

Q&A: Sanjiv Bajaj, Joint managing director, Bajaj Capital

The financial sector in the country is seeing significant changes. The global meltdown has made investors and financial advisors take a relook at their investment portfolios. Policy-makers are also taking measures to strengthen the system and protect investors’ interests. Sanjiv Bajaj, joint managing director of financial advisory firm Bajaj Capital, tells Vrishti Beniwal that long-term investments without tax sops do not do well in any market. Excerpts:

How should an investor reorganise his portfolio in the changing economic scenario?
There might be some more pain to go. This is the time to book profits. If you have a 10-15 year horizon, shift a part of your investments in debt and shift back to equity over the next 12-18 months. If the horizon is two-four years, staying invested in debt is a better option.

Would you suggest moving away from unit-linked insurance plans (Ulips) to traditional products?
People are going for traditional plans but it is not healthy. As insurance is a long-term product, you cannot remain invested in debt for 20 years. If the market is decent, traditional policies give an average return of just 6 per cent over a horizon of 20-25 years. Debt is for short-term investments of up to 10 years and is recommended when you want risk-free returns for disabled people or grandchildren.

What will be the impact of the direct tax code proposal to tax savings at withdrawal?
EET (exempt-exempt tax) concept is prevalent in developed countries where people do not believe in savings. The growth in India and China has been led by high savings. If we shift to an EET regime, the PPF (public provident fund) will not remain attractive, the mutual fund money that was behind foreign inflows will be hit and the number of people buying life insurance will come down. Long-term investments without tax sops do not do well in any market.

Insurance regulator Irda has put a cap on charges. How will this benefit customers?
This will benefit customers in the long run. Mutual funds and Ulips are equal now. Insurers will have to restructure 60 per cent of their products to comply with the new norms. Due to the new norms, insurance companies may see 10 per cent growth over what they would have achieved without the cap.

Do you see merit in the Swarup panel’s suggestion on replacing agents’ commission with fee?
This will hit small investors. If a small investor is paying Rs 1,200 as commission from his pocket now, the amount will go up to Rs 5,000 in a fee-based system. This will put agents out of business. It may lead to 40-50 per cent reduction in new business premium over the next two years. Everyone knows that life insurance is a must for the family. But in India, people do not buy such things if no one runs after them. Even with so much media hype, the new pension system is not doing well because agents are not involved.

The committee has also recommended conducting examination for insurance agents. Your take?
The bank employees which sell financial products are also not trained to do so. Massive misselling is happening through the bancassurance model. Insurance companies have already taken up the issue with the insurance regulator.