The Hindu Business Line : Assured returns plans hurting MF growth: Study

COMPETING with attractive assured returns from Government schemes is the single biggest impediment to the growth of the mutual fund (MF) industry, according to a report submitted by Cadogan Financial.

The report, titled `Reforms of mutual fund industry', prepared in association with AF Ferguson and Company, recommends that the attractiveness of Government schemes be reduced in order to encourage the MF industry.

It urges use of the existing MF structure for provision of pension funds and direct regulation of distributors.

The report also recommends that the sponsor system of AMCs be done away with.

"Instead, a concept of promoter of the AMC should be introduced. After five years, the concept of professional trustee companies would replace the promoter."

The report has been put up by Securities and Exchange Board of India (SEBI) for public comments.

Earlier, the recommendations made in the report were circulated as a draft interim report to market participants in November 2003 and reviewed at an industry forum attended by the Ministry of Finance and the SEBI on December 6 2003.

Analysing the Indian industry, the report states that the investor profile is very short-term and turnover of units by investors is very high compared to the UK and the US.

The average length of time an investor stays in a securities scheme, other than a money market/liquid scheme, is one-fifth of the time in the UK and two-fifths of the time in the US.

The report's recommendations on tax sops for the industry suggest an `imputation' system where all income (dividends and interest) as well as capital gains (short-term and long-term) are taxed at the applicable rate in the hands of the mutual fund investor, thus ensuring tax neutrality with direct investment.

"Tax suffered on income by deduction at the hand of the issuer of the security or tax deducted at source by the issuer of the units of the mutual fund is passed on as a tax credit to the investor and capital gains are retained in the MF free of tax, with the investor paying tax on final disposal of the units at his relevant rate."

The report added that while assets under management of the industry have grown, UTI and other State-owned AMCs have lost market share, while private sector funds have grown rapidly.