BackRegulator charts plan to grow MF industry to `20 trillion in 5 years
Sebi wants tax incentives for investments in mutual funds and new classes of such funds to expand the industry
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The Securities and Exchange Board of India (Sebi) wants tax incentives for investments in mutual funds and new classes of such funds to expand the industry from ₹ 8 trillion now to ₹ 20 trillion in five years.
The industry has stagnated over the past four years after Sebi instituted a ban on so-called entry loads, or sales charges paid to distributors of mutual funds.
The plan was conceptualized last month by Sebi’s mutual fund advisory committee.
“..With a long term policy in hand, huge growth may be targeted in assets under management from (the) present ₹ 8,00,000 crore to ₹ 20,00,000 crore in a period of five years," Sebi said in a board note reviewed by Mint.
The note added that this growth would see an increase in the number of investors and distributors, and more investments from so-called B-class towns.
Over the past two years, Sebi has taken a number of measures to re-energize the 44-company industry. In September 2012, Sebi allowed mutual funds to levy additional charges on existing schemes to bear the cost of distribution across locations beyond the top 15 cities in the country.
That doesn’t seem to have helped. According to data from industry lobby group Association of Mutual Funds of India, or Amfi, the top 15 cities accounted for 87% of the assets under management as on 31 December.
In an effort to attract long term savings into mutual funds, one of Sebi’s proposals is to introduce the so-called mutual fund-linked retirement plan, which will be akin to insurance-oriented retirement benefit plans.
The note said that such plans, similar to the popular 401K plan in the US, can be introduced with tax incentives in India too. The 401K plan in the US allows employees to have their retirement funds managed by managers of their choice. It allows the employee to choose an investment product of his or her choice through the employer’s 401K plans.
“There is a huge scope for growth in India’s retirement benefits market owing to low existing coverage... and a large workforce in the unorganized sector, vast majority of which has no retirement benefits," Sebi said.
Sebi estimated that even if 10% of the 36 million tax-payers in the country invest an average of ₹ 50,000 in such retirement plans, it would result in an annual inflow of ₹ 18,000 crore into mutual funds.
Sebi has proposed that the government allow a tax benefit of ₹ 50,000 for investments in such plans, over and above the existing ₹ 1 lakh limit on investments eligible for tax benefits.
Such new products will be so designed that anyone between 18 and 55 years of age can invest in them, according to Sebi, which envisages two types of mutual fund-linked retirement plans: those that own securities directly, and those that serve as a fund of funds and invest in existing diversified schemes of mutual funds.
Sebi has proposed that investments in such plans have a minimum lock-in period.
Sebi also wants to make mutual funds attractive to investors from the tax perspective.
It wants all long-term mutual fund products to be given the same tax treatment as investments in life insurance, and provident and pension fund products. The board note cited the Reserve Bank of India’s 2013 annual report to show that 56% of household savings are channelized into such traditional products.
“It needs to be recognized that mutual fund products which do not provide capital protection (except capital protection oriented scheme) and assurance of return competes inequitably with products such as EPF (Employees’ Provident Fund) and PPF (Public Provident Fund), insurance that provide assured return coupled with tax benefits and also with the National Pension Scheme which provides tax benefit," the note added.
Sebi suggested an alternative to its own recommendation of a ₹ 50,000 increase in investments eligible for tax benefits from the current ₹ 100,000—an increase of ₹ 100,000 for a bunch of new schemes, including retirement-linked mutual funds, equity linked savings schemes, and pension schemes.
Sebi has also proposed that the mergers of mutual fund schemes be exempted from capital gains tax.
It urged a review of investment norms of the labour ministry, which currently prevents investment of Employee Provident Fund Organization (EPFO) money in equity and equity-oriented schemes. As per the 2012 annual report of EPFO, the total corpus with EPFO was about ₹ 5.46 trillion.
The regulator has asked the ministry to consider an investment of up to 15% of the EPFO corpus in equity or equity-oriented schemes.
“It is certainly a feasible target and the industry will hugely benefit once the proposals are cleared," said Milind Barve, managing director, HDFC Asset Management Co. Ltd, India’s largest mutual fund with average assets under management of ₹ 1.08 trillion in the quarter ended December.
“It will ensure an inflow of long term savings money to the industry which any asset industry would need to grow. The largest pool of money is always in the long-term retirement fund, which in India today is EPFO," he added. “So, even if a part of its accruals come to the industry we can get a meaningfully large corpus into equity funds."
The Sebi note said that EPFO sees an increase of ₹ 80,000 crore in its corpus every year and that even if “5% is diverted towards equity mutual funds, it may result in new inflows of about ₹ 27,300 crore from the existing corpus and ₹ 4,000 crore annually from fresh contribution".
In line with the rationale of EPFO, mutual fund products too are designed with an objective of long term investing, Sebi claimed.
Among other proposals, Sebi also suggested that investment guidelines for state-owned firms be relaxed to allow them to invest more in mutual funds.
Currently, only some state-owned firms are allowed to invest their surpluses in mutual funds and that only in those run by state-owned asset management companies.
As of 31 December, investment of central government-owned companies in schemes managed by state-owned asset management companies stood at ₹ 15,821 crore. These companies had a total cash and bank balance of ₹ 2.74 trillion as of 31 March 2012.
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