This article was published on moneycontrol.com on July 9, 2014.
In the month of February 2014, UTI Mutual Fund achieved a milestone in the mutual fund industry when it celebrated the golden jubilee of pioneering wealth creation. The celebrations were marked by an open bell ceremony at the NSE and a grand function at NCPA, which was attended by none other than the former Finance Minister Mr.P.Chidambaram. The irony of this whole affair was that as we celebrated the 50th year of existence of the oldest mutual fund house, it is disheartening to note that only 2.5% of the financial savings of the household sector are actually getting diverted into mutual funds. A more detailed look at the data points show that during the time period that is 2010-11 and 2011-12, the above number was in the negative territory, to be more precise, -1.1% in both the periods. This data point is a clear indication that amidst all these celebrations, the reality is that the industry has still not penetrated into the pockets of retail investors. Hence, my endeavor in this column is to put forward a few suggestions to the Finance Minister which will help in making mutual funds an acceptable investment option among retail investors, for whom entering directly into the equity markets will only make them feel like a fish out of water.
1. Section 80 C should be made more favourable for mutual fund investments
One of the biggest problems that the mutual fund industry is facing is that it has still not been able to become the first choice for investors when they wish to enter the equityy markets. The data points quoted above is a clear indication that there is a long way to go for mutual funds to be the first recall when investors wish to park their surplus in an instrument which will help them in achieving their long term goals. The question that needs to be asked at this juncture is this: “Will investor awareness programmes so rigorously conducted by fund houses or even putting up hoardings on the advantages of mutual funds in every nook and corner of the country really help in the penetration of this industry”? The answer is a definite no and the solution to this problem is to make the mutual fund route more lucrative so that investors will invest their hard earned money without much compulsion. For this, North Block will have to seriously think of increasing the limit under Section 80 C and in addition to this also allow more categories of mutual funds to take advantage of this benefit. Here, the reference is to categories like large cap funds, multi cap funds and even balanced funds. We believe that these categories of funds will be an ideal choice not only for first time investors but even for those who have burnt their fingers while dealing with equities directly. As the norm is to subject tax saving options to a lock in period, we would prefer volatile categories like mid cap funds, sectoral funds, etc. to stay out of this race.
2. Dividend Distribution Tax should be reduced for liquid funds and ultra short term funds
As per the Reserve Bank of India’s Annual Report (2012-13), more than 50% of the financial savings of the household sector is parked into deposits of commercial banks during the year 2012-13. This means that the banking industry is getting a good chunk of investor surplus which we believe can be easily diverted into the mutual fund industry via liquid funds and ultra short term funds. These funds can compete with deposits on various parameters like liquidity, risk, returns and taxation. Normally, when investors park their surplus into these funds for a time period of less than a year, they would ideally go in for the dividend option. In this case, the Dividend Distribution Tax (DDT) is 28.325% and we can safely say that this is still lower than the taxation applicable on deposits especially when we consider investors in the highest tax bracket. However, we feel that there is a need to bring in a drastic reduction in DDT so that investors belonging to all tax brackets can take advantage of investing into liquid funds or ultra short term funds.
3. Conducive policy for all players in the mutual fund industry
In the last few years, the mutual fund industry has been going through a phase wherein, foreign fund houses which were launched with a lot of fanfare to take advantage of the huge potential provided by India actually packed their bags and left Indian shores. Although we have been telling investors that they need not worry about this trend as these fund houses are actually getting sold to domestic giants, we strongly believe that the mutual fund industry should not be subject to Charles Darwin's “Survival of the Fittest” theory. The Government should bring in strong measures which are conducive not only for the survival of foreign fund houses but also smaller domestic fund houses which are struggling to stay afloat in this tough environment.
An interesting observation that I would like to share here is that if we analyze the AUM of fund houses over a period of 5 years, then it can be seen that on an average, approximately 78% of the corpus of the entire mutual fund industry is concentrated in the top 10 players. This definitely is a matter of concern and requires a change as we cannot have investor surplus being parked in an industry which runs on the monopoly of a few players. We believe that as the number of fund houses increases, the huge competition will check any misselling that is taking place and the existence of more foreign players will make the industry at par with global standards. I will quote a few examples to show North Block why unlike other industries, Mutual Fund industry should not get into a phase of consolidation.
- Some of the older fund houses have more than 3 funds in each category, which only leads to confusion among investors. On the other hand, a majority of the new players have only a few funds in their entire product basket and the investment strategy is made very clear to investors.
- The investment strategy of the fund will be to invest into midcap stocks. However, many of the funds over a period of time become either large caps or multi caps without informing the investors.
- In the current scenario, when infrastructure funds have become the flavor of the season, some of the bigger fund houses are taking exposure into banks and IT under the guise of investing in infrastructure-related businesses. Investors who do not bother to check the portfolios of these funds are parking their surplus thinking that they are investing in the infrastructure growth story. Here again we have live examples of small/foreign fund houses actually sticking to the mandate which is being appreciated by investors.
Mr. Finance Minister, these are only a few instances of how our investors are being taken for a ride and hence the Government should make sure that smaller fishes are allowed to survive in an industry which has the capacity to absorb more than 50 players.
4. NPS needs to be restructured to gain more acceptability among investors
Although the National Pension System (NPS) was launched to provide Indians a low cost option for their retirement, this scheme has not taken off as well as expected. One of the suggestions that we would like to put forward is to make this scheme more vibrant by letting them invest into actively managed equity funds which have been known to be consistent performers over a long period of time. This is because as of now, these schemes are investing into direct equities and since neither the fund managers are known in the industry nor the schemes have a track record, investors in the private sector will be apprehensive to park their surplus here. This definitely will increase the cost, but North Block needs to remember that investors are willing to pay, if NPS shows the potential to reward them for saving for their retirement.
I firmly hope and believe that the Finance Minister will give a serious thought to these suggestions that have been given as it will not only help the industry in the long run but also our retail investors who continue to follow their parent's footsteps of investing into fixed deposits.