India, Aug. 19 -- Sometime over the course of financial year 2025-26, the unthinkable will happen. The assets under management (AUM) in the Indian mutual fund industry will overtake those in the life insurance industry and end the current financial year just below the Rs.80 lakh crore mark. Not just in terms of size, but also in terms of reach: Life insurance penetration (percentage of life insurance premiums to GDP) has remained stuck at less than 3% for over a decade, while the share of mutual funds in household savings has gone up to 8.4% in March 2023 from insignificant levels earlier. While the mutual fund SIP has become a household name, the bad smell around mis-sold life insurance products refuses to go away. The reason for this change lies in the regulatory behaviour faced by these two industries. This is a text-book case which proves that an investor-first regulatory vision is good for the investor, the agent, and the industry. What happened to an industry that was less than half the size of the gigantic life insurance industry a decade ago, that has grown big enough to overtake the latter? The power of good regulatory compounding has resulted in a growth rate of an annual average of 20% for over a decade for mutual funds. The 12% annual average AUM growth for the life insurance industry looks tepid in comparison. The success of the mutual fund industry must not be seen as an accident, but a policy design that put investor protection at the heart of capital market regulation. This meant three things. One, aligning sales incentives. Starting 2006, capital market regulator Securities and Exchange Board of India (Sebi) has constantly pushed at regulation that removes the incentives to mis-sell. In 2006, Sebi removed the 6% marketing charge that investors paid to fund houses for new fund offers. This used to result in multiple new schemes without any logic, just to harvest the charge by churning investors in and out of schemes. The most significant move came in 2009, when Sebi removed the upfront commission that was embedded in the price of the mutual fund. Called a front-load, this commission encouraged agents to churn an investor portfolio just so that the agent could harvest the front commission on every new purchase. India became the first market in the world to take this dramatic step in investor interest. In 2018, Sebi banned the upfronting of trail commissions (agent commissions that sit at the expense ratio that should be paid at the end of a holding year) that was again skewing investor choice. Two, reducing costs. In 2019, Sebi reduced the expense ratio, or the cost investors pay each year as a fee to the mutual fund for its services. These ratios had been fixed in 1996 and needed to come down as the scale of the industry grew. And three, making disclosures meaningful. In 2020, Sebi made funds go "true to label". This means, for example, a large cap (defined as the first 100 stocks according to market cap, which is a metric to see the size of a company) cannot stuff the portfolio with small cap stocks just to show higher returns, never mind the higher risk. This it did for all the categories in the market. Basically, Sebi tried to ensure that if you are on a bus that goes to Noida, it will not go to Gurugram. On each of these metrics, the insurance regulator has failed. Investors do not really understand what they are buying. They do not understand the cost of an early exit from long-term policies. They do not get a clear answer on what the return is likely to be. Worse, they are trapped by agents and banks into products they clearly did not need or understand. Only this explains the early death of life insurance policies in India where less than half the policies sold survive a five-year premium paying term. For a 20-30 year product, this should be a terrible moment of truth, except that the industry actually books profits from the money lost due to early surrender by the investor. Front-running, mis-selling, and sharp sales, all happen in the mutual fund industry too. No amount of regulation will give us a fully clean market, but the strong flow of money into the industry shows that investors are learning to navigate risk, have understood that the rules of the game are there to protect them in mutual funds. The same cannot be said about the life insurance policy-holder in policies that bundle both insurance and investment, who usually feels trapped by the product. As the owner of the largest life insurance company in India and owner of the largest part of the banking sector, the government of India has a responsibility to ensure that investors in life insurance are not misled and trapped. Because what is good for the investor is not just good for the industry, but also the nation. Due to the fat retail pipeline into mutual funds, the Indian stock market no longer is at the mercy of foreign institutional investors. Fixing a soon-to-be Rs.80 lakh crore behemoth so that investors are protected can only be good for everyone in the story....