Retail participation imperative for MF industry, says AMFI

In an interview with CNBC-TV18, HN Sinor, CEO, AMFI (Association of Mutual Funds of India) said that various short and long term tax related issues were discussed during the meeting with the secretary of DEA. According to him, there are certain major objectives that need to be fulfilled to kick start the industry. 

"The key objectives were, first of all whether there can be greater retail participation, second whether there should be greater geographic reach and third, investors should come in. So investors' interest are to be taken into account. Fourth is of course realignment of interest of all other stakeholders including the distributors and the AMCs," explained Sinor.

Sinor believes greater retail participation is imperative for the MF industry and the industry found it prudent to tackle expense ratio in comparison to entry load problems. He feels the industry needs structural changes and to lure investors towards mutual funds, effort must be put in by the industry. Along with this, investor mindset must also change, thinks Sinor.

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying videos.

Q: You had a meeting with the secretary to the Department of Economic Affairs (DEA) R Gopalan. What exactly does the mutual fund industry expect from the government?

A: I think we had a very businesslike meeting that day and we discussed various aspects of the mutual fund industry. Short-term, long-term, tax related etc. I think the best sense that we got from them was that everyone had a very open mind to see whether we can really kick-start this industry which is otherwise stagnating for the last three years.

The key issue of course is that we need money in capital market and retail participation is absolutely necessary for that purpose. Second thing is that we are still focused on only a few cities in India and whether we can spread out to larger number of Tier 2 Tier 3 towns.

The key objectives were, first of all whether there can be greater retail participation, second whether there should be greater geographic reach and third, investors should come in. So investors' interest are to be taken into account. Fourth is of course realignment of interest of all other stakeholders including the distributors and the AMCs.

I think those are by and large the issues that we flagged. Some issues were short-term in nature, some medium and long-term and I think we came out with our suggestions and I think the government listened to us very carefully on this.

Q: Is there any chance at all that the entry load issue will be revisited and some kind of entry load will be permitted or alternately, a higher expense ratio will be tolerated for equity mutual funds? After all it is a pain to distributors or the lack of payment to distributors that appears to have hamstrung the industry.

A: On entry load, let me say one thing that it is an old matter. I think the system is gradually settling down without the entry load. Everybody has been looking at alternate business models and we found that it is better to tackle the expense ratio rather than really looking at the entry load.

Now this is where we said that whether across all the slabs, expense ratio can be increased by 25 bps. But this is in order to make the whole issue somewhat cost neutral to the investors. This is a very critical point.

We are also suggesting that the exit load which is right now being used by the manufacturers for paying out the distributor will get credited to the schemes. It will in a way go back to the investors. If you look at the way the system operates, it’s almost about 20 bps. So net-net that 25 bps increase in expense ratio will largely get compensated by 20 bps in terms of exit load going to the schemes.

Q: Just wanted to focus on the investor sentiment at this point in time within the mutual fund space. Give us a sense in terms of the retail participation at this point and how much is your ticket size in terms of which are the most attractive schemes and what are the redemption figures looking like as well?

A: If we look at the history of the last three years, I think whatever the gross sales were we have almost equivalent redemptions taking place, except perhaps in the area of ELSS (Equity linked saving schemes) or the Systematic Investment Plans (SIP). Essentially, on the Systematic Investment Plan we have been seeing almost about 55-60 legs transaction taking place on a month-on-month basis and there is an incremental flow of around Rs 1,000-1,500 crore.

This is one very interesting area. This is where we proposed to the government that these Rajiv Gandhi Equity Schemes should flow through. Actually in the mutual fund industry, even if an individual would say Rs 4,000 a month, at the end of the year it is about Rs 48,000-50,000. If this kind of a tax base is available it will greatly incentivise the retailers to flock into this particular scheme.

Q: In that vein, was the industry also pitching for some kind of tax benefits? Fairly decent tax benefit is available to the Rajiv Gandhi scheme investors, would that be one point of plea because that will give you another elbow room for expenses?

A: Yes, in fact we discussed some of the issues which are of a short-term nature, we are actually talking to SEBI and in consultation with SEBI we are trying to work out various issues. But the key issue is around structural changes which are required to be made.

For the structural changes, the government has to step in for making mutual funds a pull product and make it attractive for the investors. Something similar to 401k in US which we thought can be introduced.

Second thing is that we also mentioned about pension plan. You must have also heard SEBI chairman talking about it on and off saying, that it should also get a similar kind of break if it is done through the mutual fund route.

Third is on the insurance business. I think it is not made mandatorily but, at least allow freedom to the insurance companies who would like some of their assets under management to be managed by AMCs. I think they can be allowed to do so.

Likewise, earlier we used to have this 54E where if you invest for a period of three years, you don’t have to pay tax. Something similar can also be thought for the mutual fund industry. These are the four-five suggestions which we have made to the government.

Interestingly, the secretary mentioned that while this budget has gone, they keep preparing themselves. So they have taken note of it and I am very hopeful that they will certainly give some serious consideration to some of our suggestions.

Q5: Overall in a secular sense, are you seeing a kind of a secular increase in investor appetite for mutual funds? SIP seems to have found a place in financial planning for a larger category of retail investors. There is a realization that while the insurance led products have a better push factor in terms of people coming in and selling at your doorstep, there is a mortality charge and other charges which ultimately take away the gains. Is there a realization that mutual fund really is a product that benefits. Are you seeing any evolutionary change in the retail investors' mindset?

A: It will take time. To be very honest with you, for all financial services products one needs to create trust around that. Unless and until that trust is build around a product through performance or other factors, retail investors will not come in very easily.

It's an ongoing process. That's why say investor awareness programs etc. need to be conducted in an ongoing basis. But it takes time. I wouldn't say that overnight there can be a change of heart on this.

Q: There are news reports indicating that there could be some liquid schemes which could be under the SEBI's scanner with regards to split investments and possibly benefiting on a possible price advantage. Wanted to get your comments on it.

A: I also read in the paper this morning about it. I had no idea about it. But, the question about the NAV calculation is going on with SEBI for almost about a year. The latest instruction is that only on realization of the amount, the NAV should be calculated. It’s a pure technical issue.

Really it's not that you are trying to help one vis-a-vis the other etc. I would say that once the proper structure is in place, you would take away any discrimination.