Editorial: Bring back entry loads

Feb 13 2014, 23:09 IST
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SummaryNo other measure will help revive mutual funds

That Indian households seem to prefer almost every other asset class to equities has been evident for some time now—equities comprise less than 6% of household financial wealth and that’s exluding real estate. Indeed, despite mutual funds (MF) having been around for more than two decades now, their total

Assets Under Management (AUM) are less than Rs 10 lakh crore having hit a lifetime high of R9 lakh crore at the end of January. For perspective, over this time, the Sensex has given a return of more than 26 times. More pertinently, even if the AUM grew by about a compounded 18% between 2009-2013, the inflows into equities shrank 5% in FY13; barely a fifth of the current corpus is channelled into equities, the bulk of it is invested in income schemes. Which is why trying to incentivise asset management companies (AMC) to sell MF schemes in the smaller towns or recommending that investors be given a R50,000 tax sop is neither here nor there. It may be true that the top five cities contribute 74% of the pie but there’s little point in the capital market regulator trying to push sales of MF products in Tier II and Tier III towns if the market in the metros can’t be stimulated.

The Securities and Exchange Board of India (Sebi) said on Thursday it wanted the minimum net worth of AMCs be raised to R50 crore from the current R10 crore. That may not be such a bad idea because size brings with it a certain level of comfort to investors; for foreign players, in any case, an amount of less than $10 million is insignificant. The regulator also introduced the concept of seed capital saying 1% of the amount raised—subject to a maximum of R50 lakh—should be invested by AMCs in all open-ended schemes, a move that should make the managements more accountable. Sebi’s recommendation to allow the EPFO to invest up to 15% of the corpus in mutual funds and shares looks like it will provide another source of funds to MFs but given the reluctance of the EPFO’s board of trustees to invest in the stock markets, the move is likely to have little impact. Given that MFs remain push products, nothing is likely to work as well as commissions; while agents do earn trail commissions, these are not good enough. Bring back the entry loads.

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