The Evolving Landscape of Mutual Funds in India

Mutual Fund Summit

The Indian mutual fund industry is primed for significant growth, offering immense investment potential. With a growing middle class, rising financial literacy, and a culture of savings, it is set to play a vital role in wealth creation and financial planning. Evolving regulations, innovative fund houses, and savvy investors further enhance its potential, making it an enticing arena for seasoned and new investors alike. We examine the recent developments within India's mutual fund industry and explore the path forward.

Tax Changes Impacting Debt Funds
Effective April 1, significant tax changes have impacted Indian debt funds. Previously, selling debt funds after a 3-year holding period incurred a 20% long-term capital gains tax, along with indexation benefits. However, the Finance Bill removed these indexation perks. Fortunately, gains on debt fund investments made until March 31, 2023, will be grandfathered, offering relief to investors. These changes aim to address tax discrepancies favoring high net-worth individuals, aligning with previous efforts regarding premium unit-linked policies and traditional endowment policies.

Enhancing Security and Transparency
Since July 2022, SEBI has enacted a pivotal reform, requiring funds to flow directly between investors and mutual funds. When investing or redeeming, money moves seamlessly between investors' and fund accounts, bypassing intermediaries like distributors, online platforms, and advisors. This ensures the secure transfer of funds and eliminates past misuse concerns. Originally scheduled for April 1, 2022, the implementation was extended to July 1, further fortifying safety and transparency, guaranteeing that investors' funds reach their intended destinations securely.

Mandatory Nominations
Starting October 2022, new mutual fund investors needed to nominate beneficiaries. Existing investors must do so by September 30, 2023, or explicitly decline. Failing to nominate by this date freezes your folio, halting redemptions and switches. Nomination is crucial, designating someone to receive your investments after your passing. It simplifies fund transfer per your will and estate planning. The mutual fund industry advocates nominations, offering platforms like MF Central, CAMS, KFintech, and Mutual Fund Utility. Vital for sole or joint holders, nominations ensure seamless asset transfer.

Passive Tax-Saving Mutual Fund Schemes
In May 2022, SEBI greenlit the launch of passive tax-saving mutual fund schemes, or Equity-Linked Saving Schemes (ELSS). These innovative options grant investors income tax deductions under Section 80C, with a maximum investment of Rs 1.5 lakh, effectively reducing their taxable income. SEBI's decision accommodates emerging players like Zerodha, focusing on passive funds mirroring benchmark indices. This choice impacts new fund houses, compelling them to specialize in either active or passive management, and providing investors with a fresh array of investment avenues.

Regulator’s Approach to Mutual Fund ERs
In 2023, SEBI reviewed mutual fund expenses, including fund manager, RTA, custodian, and other fees. Initially, SEBI expected expenses to decrease with fund size, but their assessment showed unexpected results. In March 2023, prompted by industry evidence, SEBI reconsidered. The future of expense ratios is uncertain, with potential changes to the TER formula, linking it to fund house equity assets, and reviewing brokerage fees. Some fund houses charged excessive brokerage fees, affecting investors. SEBI is also addressing NFO issues, where distributors nudged clients towards higher TER options, raising cost structure questions.

Industry Stalwarts and Newcomers
Axis AMC, established in 2009 as a wholly-owned subsidiary of Axis Bank, is among India's fastest-growing asset managers. They offer a wide range of asset management products, including mutual funds, portfolio management services, and alternative investments. Schroders acquired a 25% stake in September 2012. The company's success is attributed to its core values of customer-centricity, transparency, teamwork, ownership, and ethics. As of June 30, 2023, Axis MF offers over 67 schemes, operates in 100+ cities nationwide, manages 1.26 crore active investor accounts, and holds an AUM of over INR 2.48 crore. (Links: Axis MF, Axis AMC)

In recent years, India's mutual fund industry has seen remarkable growth, with new players like Trust MF, Samco MF, NJ Mutual Fund, and WhiteOak Capital MF emerging. In 2023, regulatory approvals expanded to Bajaj Finserv, Helios, Zerodha, and Old Bridge Capital. SIP's popularity surged from Rs 3,000-4,000 crore to almost Rs 14,000 crore, driven by the "Mutual Funds Sahi Hain" campaign. Some newcomers, like Zerodha MF and NAVI Mutual Fund, exclusively focus on passive funds post-acquisition of Essel MF. Industry veterans Samir Arora and Kenneth Andrade are making comebacks with Helios Mutual Fund and Old Bridge Capital Mutual Fund approvals.

To know more about the investment ascent in India with the nation’s leading financial pioneers, tune in to the Moneycontrol Mutual Fund Summit, 11th October 2023 in Mumbai, 3.50 pm onwards. Log onto www.moneycontrol.com/msite/mutual-fund-summit-2023

Powered by Axis Mutual Fund, Strategic Partner Reliance Industries Limited, Associate Partners HSBC Mutual Fund, Motilal Oswal Asset Management, 360 ONE Asset, IBM, Baroda BNP Paribas Mutual Fund, Mirae Asset Mutual Fund

Moneycontrol Journalists were not involved in the creation of the article.