Suggestions to increase retail participation in Mutual FundsNo. of comments:2 Devendra Mhatre, Mumbai, 2487 On 23-Sep-2014It is very important to channelize Retail Investors savings to well regulated Mutual Fund Industry particularly after the recent Chit Fund Scams, Multi Level Marketing Scams where ignorant retail investors are easily lured by tall claims and false promises made by agents of such schemes. Equity markets have rallied in last 6 to 8 months but unfortunately the retail investors have not participated in the markets to the desired extent, Debt Mutual Funds offer good opportunity to retail investors to diversify risks. Mutual Fund Industry should focus their energies to tap the huge potential offered by the retail investors and design their products, processes and marketing strategies to mobilize and retain long term investments from Retail Investors. Mutual Fund industry will have to work closely with Regulators, Finance Ministry, Technology and Media to simplify procedures, reduce operational & investing hurdles and induce by giving suitable tax benefits, have a stable and long term vision on taxation policies, removing imaginary fears among retail investors. The list is long but we need to start somewhere. Following are my suggestions to increase retail participation in Mutual Funds:
1) The Dividend Distribution Tax on Debt Mutual Fund investment was increased to 28.325%, in July 2014; this should be made NIL or limited to 5% for Retail Investors only.
2) To avail of Long Term Capital Gain Tax on Debt Mutual Fund investment, the holding period was increased to more than 36 months in July 2014; this should be restored to earlier holding period of more than 12 months for Retail Investors only.
3) Simplified and easy to understand Statement of Account in standard format for all Fund houses
4) Foreign Account Tax Compliance Act (FATCA) is currently applicable on investments made by US based NRIs in Mutual Funds. Most of the Fund Houses have stopped accepting investments from US based NRIs. Is FATCA currently applicable on Bank Deposits, Insurance Policies, Real Estate Investments, proposed RIETs, listed and unlisted Equity or Debt securities? If FATCA is not applicable in either one or all the above investments by US based NRI, Mutual Fund investments should not be singled out for applicability of FATCA.
5) Currently 3 year Closed ended FMPs / Cap Pro Debt Funds are compulsory redeemed to investors on maturity. The investment attracts lower taxation if holding period is more than 36 months as per current taxation rules (due to Long Term Capital Gain Tax). The investment should be converted to open ended Fund (not switch to another Scheme) after 36 months so that the investor can withdraw his investment anytime after 36 months which will suit his cash flows requirements and continue to avail of the benefit of LTCG tax as long as his investment remains in the Fund. Currently it is compulsory redeemed after 36 months and if the investor has cash flow requirement after say 40 months, the moneys will remain idle in savings bank account or he has to park in liquid Fund and pay higher DDT for 4 months.
6) Increasing Average Life of Assets in Open Ended Fund is a challenging task for the entire Industry. Most retail investors do not have a happy experience with their MF investments as their holdings are for comparatively shorter period. Monetary incentive is a powerful tool; all partners viz; Retail Investors, AMC and Distributors should be incentivized to increase the average life of assets. Retail Investors who have stayed with the scheme for say more than 24/36 months could be given a certain discount of say 3 to 5% for additional investments in the scheme. Similarly, AMC and Distributors should be incentivized based on life of assets. We can consider a premium of say 0.25 to 0.5% to NAV at the time of investment. This amount will remain in the Scheme and can be shared between the AMC and Distributors after 24 months in proportion of the percentage of Retail Investors assets whose life is more than 24 months in the Scheme. For Example if the proportion of assets whose life is more than 24 months is say 30% of AUM, only 30% of such income can be shared and balance 70% remains with the scheme, thus higher the proportion of assets having more than 24 months holdings, more the share of Income can be shared by AMCs. Additional proportion can be considered for assets with more than 36/48/60 month’s life.
7) Mutual Funds should tap Long Term Retirement Funds in Special Scheme with holding period of minimum 10 years and which should have EEE or Exempt- Exempt- Exempt taxation. The Scheme should give total freedom to Fund Manager/ Investor to invest 0 - 100% in Equity or Debt at any point of time. This could supplement or become alternative to his current retirement investments viz; PF, Gratuity, PPF etc.
8) Currently indicative returns on Debt Fund investment cannot be mentioned to prospective retail investor; however the Regulatory Authorities do have such restrictions on more volatile Equity Investments where indicative returns are openly mentioned in research reports, pink papers and electronic media. eg. “ABC company shares are expected to touch Rs 1050/- by end Dec 2014, the current market price is Rs 900/- or “Nifty to cross so and so by March 2016”. Similarly future expected returns are openly dished out for Real Estate and Insurance Policies to lure and trap investors. A simple request to Regulatory authority is that “for prospective Debt Fund Retail investors be given guidance (if not indicative return) based on underlying portfolio or current market yields.”
9) Currently the AUMs of Scheme mentioned in Factsheet is Quarterly Average AUM. Thus, for Factsheet published with portfolio as on 31 August 2014, the AUM figure is as on 30 June 2014. We need to incorporate the Quarterly Average AUM on rolling basis. Eg. For factsheet with portfolio of 31 Aug 2014, the average AUM of previous 3 months i.e. June, July and August should taken in to consideration to give more realistic picture. For Sept 2014 portfolio, Avg Quarterly AUM will take into consideration the AUMs of July, Aug and Sept.
10) Scheme Factsheet should also mention monthly purchases / redemptions during the month and changes in unit holdings over last 3 to 6 months. No. of investors at end of month in each scheme would be useful to understand the retail participation in the scheme.
11) Demat of Units does not serve any purpose. A major problem arises when units are dematted is that the Registrars lose the investors data to DP. The tracking of such investments by Distributors becomes difficult as the latest data is not available. The problem can be solved if both the Registrars and DP have the mirror data.
12) Channelising retail share holdings in Demat form to Mutual Funds
Several retail investors wish to get rid of small shareholdings in various companies held in demat form. We need to tap this huge retail wealth by helping them to dispose of their holdings and invest directly in our Mutual Fund Schemes. The investor can give an undertaking that the sales proceeds of his shares held in demat form can be invested in any one of our schemes.
Now that we have a common KYC registry, it will be easier to channelise his demat shares to Mutual Fund Units.