Battling tough times: What mutual fund industry wants

The mutual fund industry has been under the weather for quite some time. The SEBI chairman is looking to give some incentives for the industry. Manmohan Singh also believes that the industry was facing problems and something was needed to be done to resolve their issues.

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 More than the taxes what is hurting most is that sales incentives were withdrawn after the entry load was banned.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. _PAGEBREAK_ Q: Which proposals do you think could come-in in its current form? How helpful will they be? Which proposal, according to you, is possibly the most beneficial at this point in time? A: I want to break it up into two, what SEBI can do and what requires the intervention of the government. If there is some tax benefit to be given then that has to be done by the government, it can’t be done by SEBI. SEBI can do three things, service tax, fungibility of TER and increase of TER. There is also some talk about increasing the TER in the smaller towns. That we can reach out to the investors in the tier II, tier III cities. I think that can happen fairly soon. Longer-term, we should be allowed to manage pension and insurance assets. The fact remains that globally a lot of flows into mutual fund are driven by some tax benefits. As far as your provident fund goes, you can only invest into the Employees' Provident Fund Organisation (EPFO). Why should not an investor have the choice of investing in New Pension Scheme (NPS)? We are not going to be allowed to manage NPS money. So, through that route, mandatory long-term savings will come into the industry. The mutual funds then in turn invest in the debt and equity capital markets. If the long-term money comes in then you can have that money available for financing India’s infrastructure and investment requirements. Let me not call it mutual industry, I would like to call it the investment management industry. So, 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. It is a very simple request. Treat us as an investment management industry.  Q: Have you noticed any improvement in investor appetite for mutual funds? Are you beginning to see systematic investment plan (SPIs) for instance becoming a permanent part or an increasingly important part in financial planning? A: There is no doubt that SIPs are an integral part of financial planning. They are very important. However, because of the risk aversion and volatility in the market, people have generally switched off of pulled back a little bit form investing in equity funds, whether it is lump sump investments or in some case systematic investment plan. In terms of its importance, I think it’s very important to ensure disciplined long-term saving. Right now, there is little bit of pullback because of risk aversion. Q: What exactly is your view on the market? We have had lot of disappointment from the ECB. But we have had that FII inflow which is keeping our head above the water, atleast since July. What are the triggers that we can watch out for? A: Clearly, growth has slowed. Investments have slowed in India. There is variety of reasons for it. There is the global overhang, there are perceived policy issues, and there are taxation issues. So, there is a little bit of uncertain economic environment. For FII money to come in the long-term, there needs to be some kind of clarity on the tax regime. So, clearly we need to watch out for that. I think the Prime Minister and the new Finance Minister will take steps to ensure that there is clarity and there is some stability. If somebody comes in with a three-year investment horizon and you change the rules in those three years, it doesn’t work really well. I think that should happen. I think growth has slowed down to 6%. But if you had 6% growth anywhere else in the world, very few countries have a 6% growth rate. Is it adequate? The answer is no. To meet the aspirations of the people of this country, we need in my view a growth rate of atleast between 8-10%. We are not going to have that right now. But I would still bet on India for the long-term.