Incentives galore for MF industry
Mumbai: With an aim to revive the mutual fund industry, market regulator SEBI Thursday announced a slew of financial and operational benefits and promised further long-term reforms, while asking the fund houses to reach out to investors in smaller cities.
Among the various steps approved at its board meeting here Thursday, SEBI allowed the fund houses full flexibility in using the amount charged to investors for various expenses and recommended to the central government to provide tax incentives to equity mutual fund investors.
In another measure that could increase the costs at the end of investors, the SEBI also decided that the service tax payable on investment management fees would be borne by the end user, and not the asset management company.
Talking to reporters after the board meeting, SEBI Chairman U K Sinha also said that a committee would be set up for framing a national policy on mutual funds and it would give the recommendations in about six months.
The regulator also decided to set up a self regulatory organisation (SRO) for regulation of MF distributors.
The steps would address issues like lack of penetration of MF products, inadequate distribution network, need for greater alignment of the interest of various stakeholders, regulation of distributors and issues concerning investor protection.
The SEBI said it has also decided to develop a long-term policy including financial inclusion and tax issues for MFs to deal "with the public policy objectives of achieving sustainable growth of the mutual fund industry and mobilisation of household savings for the growth of the economy."
The SEBI said the distributors' registration process would be simplified and the distributors base would be expanded by including postal agents, retired officials from government, banks, retired teachers etc for distribution of simple products.
To improve the geographical reach of mutual funds and bring in long-term money from smaller towns, AMCs are allowed to charge additional Total Expense Ratio (up to 30 basis points) depending upon the extent of new inflows from locations beyond top 15 cities.
Asset Management Companies (AMCs) will be able to charge 30 basis points if the new inflows from these cities/towns are minimum 30 percent of the total inflows. In case of lesser inflows, the proportionate amount will be allowed as additional TER (Total Expense Ratio).
However, MFs would be required to make complete disclosures in their half yearly report regarding the efforts to increase penetration and the details of opening of new branches especially beyond top 15 cities.
The SEBI has also asked the MFs to set apart a portion of the asset management fees annually for investor education.
To avoid differential treatment in the same scheme to different classes of investors, SEBI decided that all new investors will be subjected to single expense structure under a single plan. However, there can be a separate plan for direct investments with a lower expense ratio.
Brokerage and transaction cost chargeable for execution of trade would be capped to the extent of 12 basis points in case of cash market and 5 basis points in F&O transactions.
In order to help enhance the reach of mutual fund products amongst small investors, such as farmers, small traders/businessmen/workers, SEBI allowed cash transactions of up to Rs 20,000 in mutual fund schemes.
"To enable the mutual fund industry to be in line with all other industries where service tax is borne by the end user, it is decided that the service tax payable on investment management fees should be charged to the scheme," SEBI said.
Also, it was decided that for transaction cost of Rs 100 per transaction of Rs 10,000 and above (or Rs 150 for first time investor in mutual fund), the option to "opt out" regarding transaction charges shall be on product basis at the discretion of AMC/distributor.
In order to encourage long term holding and to reduce the churn, the entire exit loads would be now credited to the scheme while the AMCs will be able to charge an additional TER to extent of 20 basis points.
This will not result in any additional cost to the investors, SEBI clarified.
To tackle the issue of mis-selling, SEBI said that it would create a system of identification of actual sales personnel of distributors, evolve a system of 'product labeling' and include mis-selling as a 'fraudulent and unfair trade practice' in SEBI Regulations.
The regulator has also asked the AMCs to make monthly portfolio disclosures on their website. Besides, MFs would be required to disclose half yearly financial results on their websites and an advertisement in this regard would be published in at least one national and one regional newspaper.
Additional disclosures like gross inflows, net inflows, average assets under management and ratio of AUM/gross inflows distributor wise have been made mandatory for AMCs.
In order to provide fair treatment to existing investors of mutual fund schemes, it was decided to harmonize applicability of NAV (Net Asset Value) across various schemes.
Regarding the Rajiv Gandhi Equity Savings Scheme (RGESS), SEBI said its board has decided to make a recommendation to the government suggesting that the investments in equity MF schemes should be allowed for tax benefits under this scheme.
SEBI said that there is a need to develop a policy for mutual funds taking into account its importance in mobilizing domestic savings for the growth of the economy.
"The policy would include all aspects - including enhancing the reach and promoting financial inclusion, tax treatment, obligation of various stakeholders, etc. Mutual Fund Advisory Committee of SEBI would recommend long-term policy measures after wider consultation with all the stakeholders in a reasonable time frame," the regulator said.