Battling tough times: What mutual fund industry wants

In an interview to CNBC-TV18, Vivek Kudva, managing director-India & CEEMEA, Franklin Templeton Investments says, the industry has asked for two-three things. “We have asked for a slightly higher expense ratio. We have asked for fungibility of total expense ratio (TER). The third issue that is being considered is taking service tax outside the TER,” he elaborates.

The bigger issue, he says, is that long-term money is not coming into the industry. "If the long-term money comes in then you can have that money available for financing India’s infrastructure and investment requirements. My basic request is wherever there is pool of money to be managed, whether it is insurance asset or pension, allow us to participate in the management of those assets. Treat us as an investment management industry," he asserts. 

According to him, some relief to the industry is being considered. “I understand that the SEBI Board is going to meet later this month on some of that,” he adds.

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra.

Q: It is important that atleast there were positive noises from the SEBI chairman. Let us start with what is hurting most. More than the taxes what is hurting most is that sales incentives were withdrawn after the entry load was banned. Do you think that has to be reintroduced in some fashion or has the industry learnt to manage without it?

A: I think the industry has been managing without it for three years. So, it would be fair to say that the industry has learnt to manage without it. But it has been difficult. I think the issue is that the entry load was abolished suddenly. If at all there was a desire to abolish it, it should have been done in a phased manner. But having abolished it, it is very difficult to reintroduce it because you will have a backlash. Popular opinion is against its reintroductions. I think there will be a challenge to introduce the entry load.

Q: What would be the kind of sucker the industry will want?

A: There are two-three things. Firstly, some relief to the industry is being considered. I understand that the SEBI Board is going to meet later this month on some of that. I think what we have asked for is a slightly higher expense ratio. So, I understand there maybe an increase in the expense ratio by 25 basis points. We have asked for fungibility (total expense ratio) TER.

We have said once a cap is put on the expense ratio then let us use that expense ratio the way we want to. Let there not be any further restrictions in terms of management fees etc, within the expense ratio.

The third point is about service tax. When these caps were set several years ago, there was no service tax. The principle everywhere is tax is borne by the end consumer, except in the case of mutual funds where the service tax was also included as part of TER. So, the third issue that is being considered is taking service tax outside this ratio. I think that is important because the service tax may increase going forward.

So, at one level, these will provide some relief to the industry and to the distributors. But the bigger issue in my view is that long-term money is not coming into the industry. When I mean long-term money, I am not just talking of equity and debt investors investing for two-three years. The pension money and the insurance money do not come into the mutual fund industry. That is very different from what happens elsewhere in the world.