Introduction of Wrap Schemes in indian market

Indian asset management companies are exploring the option of introducing a new product — Wrap — in the domestic market, which is increasingly gaining popularity in developed markets.

Also known as wrap account, the product brings various investment avenues such as shares, insurance, bonds, tax shelters etc, under one roof, even if they come from different providers.

While this proposal is yet to take shape, a representation of the industry has sounded out the market regulator Securities and Exchange Board of India (Sebi) about the plan, sources familiar with the development said.

“The market regulator seemed to be open to the proposal, but this would need the permission of finance ministry, as other regulators (IRDA) also come into the picture,” an industry official said.

In developed markets, wrap account service, which uses a web-enabled software platform to aggregate client investments, involves managing assets within a single portfolio and is investor friendly as an investor pays a fee to the agent based on the value of the assets contained within the wrap.

This is different from the traditional investment method, where an investor pays an upfront charge to the agent on each trade. As a result, agents do not have an incentive to sell a product, which earn them higher commission and at the same time, may be disadvantageous to investors.

This product has a simple cost structure involving a single annual management fee, instead of a range of separate costs such as management fees, investment advice, portfolio management and brokerage commissions.

“Once this is introduced there will be a big change in the way insurance and mutual fund products are marketed and priced. Policy changes in the pension sector will also add variety to it,” the official said.

Wrap accounts have gained popularity in Australia, Canada, New Zealand, the UK and US in recent years, where they now account for 75% of new investment business. The original concept of the traditional wrap account has been extended to creation of mutual fund wrap accounts and ETF (exchange-traded fund) wraps.

Mutual fund wrap products, similar to the concept of fund of funds in investment philosophy, are designed to make investment allocations across range mutual funds, which may cover a variety of asset classes.

Industry officials said, in addition to regulations, the key to the development of the wrap market would be the partnerships and understanding between companies of various asset segments.

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