Old fund ideas

The Securities Exchange Board of India’s (SEBI) new ‘long-term policy’ for mutual funds (MFs) is essentially a re-packaging of old ideas. To attract household savings, it proposes to raise tax breaks for fund investments and suggests new long-term pension products from MFs. It also recommends giving salaried employees the option to route their monthly provident fund (PF) monies into funds of their choice. To enable the industry to scale up, SEBI has suggested allowing the Employees’ PF Organisation to invest up to 15 per cent of its collections in MFs and also an increase in the minimum net worth for asset managers from ₹10 to ₹50 crore.

The idea of tax breaks to attract retail investors in equity funds is hardly new. It has been tried before without success: tax-exempt equity-linked savings schemes today manage less than three per cent of the industry’s assets despite being around for over a decade. The recent Rajiv Gandhi Equity Savings Scheme hasn’t been a big draw either. The reason why retail investors are reluctant to park their savings in equities is because they don’t have the stomach for price volatility. With half of the listed stocks still hovering below their 2008 bull market peaks, it is difficult to convince ordinary investors about equities ultimately outperforming all other assets. Only a demonstrable improvement in the return experience with equities, not new tax breaks, is going to cure them of their current aversion to this asset class. Similarly, how many salaried employees would seek to re-direct their PF monies into MFs, given the mind-boggling choice presented by the 350-odd funds on offer? For the lay investor, the National Pension Scheme (NPS) that puts money into index stocks at fees as low as 0.25 per cent of assets — against 2.5-3 per cent charged by MFs — is a more appealing alternative. If SEBI wants to route long-term retirement money into equity funds, it should encourage this through the NPS and other institutions that can take care of scheme selection on the investor’s behalf. This is how retail investment in stocks happens in developed markets.

Equally flawed is the move to weed out ‘non-serious’ MF players through higher capital requirements. What retail investors need from their money managers is the skill to deliver market-beating returns. This, along with the sponsor’s governance record and commitment to the business, matters more than the ability to put up ₹50 crore in capital. In the past, global giants with deep pockets such as Fidelity, Morgan Stanley, AIG and Merrill Lynch have abruptly quit the Indian MF space, whereas many smaller fund houses have stayed on. Given that the MF industry operates on an open-end structure where every investor can vote with his feet, non-performers are automatically forced out as assets flee them over time. SEBI shouldn’t undermine this healthy competition by imposing artificial entry barriers.

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