No longer content with being just an industry association and trade body for the Rs7.13 trillion mutual fund industry, the Association of Mutual Funds in India (Amfi) is taking baby-steps towards becoming a self-regulatory organization.
In an interview, newly elected Amfi chairman U.K. Sinha refused to specify a time frame for the planned transformation, but said the objective is on his agenda. “The capital market regulator, Securities and Exchange Board of India (Sebi), has been asking Amfi to do this for quite some time. We’ll consult Sebi on the matter and soon start the groundwork to move in this direction,” he said.
Sebi now regulates mutual funds, but Sinha says the industry, with 41 asset management companies and at least 100,000 distributors, is too large and intricate for the market regulator to oversee every detail.
Define the Association of Mutual Funds of India (Amfi).
Amfi must move beyond being just an industry body. We have to engage other players who are on the periphery. Presently Amfi doesn’t have any representation from distributors or registrar and transfer agents. Ultimately Amfi must become a self-regulatory organization (SRO). We have also started talking to Sebi (Securities and Exchange Board of India) more actively. We would also like to work towards developing a mutual fund (MF) policy.
UK Sinha, chairman, Association of Mutual Funds in India, and chairman and managing director, UTI Asset Management Co. Ltd
Tell us more about this policy.
For a variety of reasons, we observe that MFs are being perceived as a short-term vehicle and it is an aggregator for liquid assets of firms. That is just one part of our overall existence; to say that that is our only objective is a wrong impression. I protest.
The policy statement will define the industry’s role, list out measures to reach out to small towns, small investors, the MF industry’s obligations and thereafter its responsibilities. We have seen policies in the banking, civil aviation, insurance and even the pension sector.
Do such policies work? Many still can’t borrow from banks, non-remunerative flight sectors go empty. However, mobile phones (an area without policy) get penetration. Aren’t we going back 25 years?
I don’t think we can call these examples as failures. Maybe they have not been able to meet their expectations. For instance, if 40% of a bank’s advances has to go to the priority sector, banks have to set aside that money. Whether it reaches the final destination can be a question we can ask.
MF pension products are excluded from the tax deduction instruments under the new Direct Taxes Code. What also hurts the MFs is the differential treatment. There will be no harm to get clarity on this from the government and the regulator.
But, despite tight regulations and strong performance, why is it so difficult to get your message across to the investor?
Low financial literacy is a problem. Competitive products can offer incentives; the MF industry can’t. Since 2003, when the markets were going up, there has never been a year when retail equity inflows in the industry has been negative. But since last one year, the retail equity inflows has been negative. In fact, we are losing around Rs3,000 crore per month on average. The number of folios is dwindling. This is also why the New Pension Scheme has not taken off despite being a good product because there is no incentive for distributors. So we have to recognize that if there are other products where it’s possible for people selling them to be incentivized in a better way, a product which doesn’t pay incentives—no matter how good it is—will be at a disadvantage.
Are we talking of a move back to a system of paying incentives?
It is too early to comment on how the policy would shape up on this issue, but I am flagging this is as one of the issues. Fortunately, we have evidence of the past 15 years. If the government or the regulator is convinced that MF is a good product for retail investors, then a suitable incentive plan can be devised.
Would an incentive-based structure address the problems of mis-selling if adviser regulations are in place?
Yes it would. The absence of distributor regulation is a big lacuna.
Would Amfi—as an SRO—be interested in taking the leading and devising distributor regulations, at least for distributors selling MFs?
We have not discussed this with Sebi or with the distribution industry; I’d be speaking out of turn, if I say we will do this. Though I think Amfi should move in that direction.
—Kayezad E. Adajania & Monika Halan