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Consumers must bear service tax burden,say MFs

MF industry meets FinMin officials,skips pitching for re-introduction of entry load

Written by ENS Economic Bureau | New Delhi | Mumbai | Published: July 3, 2012 1:56:05 am

Keen on reviving the depleting fortunes of the mutual fund (MF) industry,the finance ministry seems to have agreed to provide greater flexibility to asset management companies to manage the Total Expense Ratio as a short-term strategy. The medium-term plan would include a greater role for pension and insurance sectors in further augmenting the MF industry.

The strategies were discussed at a meeting on Monday chaired by R Gopalan,secretary,department of economic affairs,to look into ways to boost the sector and included representatives of the MF industry,Financial Advisors’ Association and Sebi officials.

“There are issues of short term and taxation nature. Those are to be fast tracked. We need to work out a balance so that the industry grows,” Gopalan said.

The mutual fund industry had pitched for higher administrative expenses,exclusion of service tax from the total expense ratio as well as hiking the trail income. Significantly,most representatives did not pitch for a re-introduction of entry load,calling it a ‘three- year-old’ issue.

The finance ministry has also asked the MF industry to conduct an in-depth study of taxation issues and before submitting their proposals. The ministry will also look at ways to increase retail participation and improve penetration of MF products in Tier II and Tier III cities/towns and to redress the grievance of investors,he said.

“We have asked them to increase the total expense ratio to 225 basis points and also allow them to credit the exit load directly to the schemes of the asset management companies so that the mutual funds do not have to pay it,” HN Sinor,chief executive officer of the Association of Mutual Funds of India (AMFI) said after the meeting.

The mutual fund industry also called for passing on the service tax bill to consumers on purchase of new schemes. At present,the tax liability is paid by the fund houses,thereby decreasing their total expense ratio. The expense ratio is mainly administrative expenditure that is presently at 2.20 per cent — of which 2 per cent is administrative expense and 0.20 per cent is the exit load.

Sources said that the meeting also looked at hiking the trial income,which is paid to the distributor if the money remains invested. At present,it is kept at 0.5 per cent of the corpus. “While the issue of entry load was not taken up,the government will do something for the distributors and there is a likelihood that they may go for increasing the trail income on mutual funds,” said the CEO of a mutual fund who did not wish to be named.

Market regulator Sebi had in August 2009 banned payment of entry load,or a 2.25 percent commission to distributors of mutual funds. But the ban is blamed for drying up inflows into these once popular investment instruments.

Sinor also said that the issue was only raised by distributors. “We have not raised entry load issue. Only distributors mentioned it. It is a 3-year old matter and the MF industry did not believe in reviving the issue,” he said.

Sources said that the finance ministry will soon come out with a revival plan for MFs,as the issue was specifically raised by the Prime Minister last week.

‘Details of Rajiv Gandhi equity scheme soon’

In a move that could boost the equity markets,the finance ministry on Monday said that it would notify the Rajiv Gandhi Equity Savings Scheme by the month-end. “We are working on it and the norms should be ready by this month end,” a finance ministry official said. Sebi has been pitching for routing this tax-saving equity scheme through mutual fund so as to minimise the risks associated with direct stock investments for the investors as well as boost the MF industry.

Entry Load for Mutual Fund schemes
What is entry load?

Entry load is an upfront commission paid to the distributor from the investment corpus of the investor.

Fund houses were allowed to charge up to 2.25 per cent of the equity investment amount as entry load to meet their distribution and marketing expenses and it provided a stable income to the distributors.

The amount left after such deduction was then invested into the scheme.

Why was it banned?

In from August 2009,Sebi decided to impose a ban on entry loads as it felt that distributors were churning investors portfolio for commissions and were not providing any value addition for the commission they were earning.

How has the industry grown since then?

As a result of the ban on this revenue stream a lot of the distributors quit MF distribution and started selling other financial products that offered higher revenues. Over the last three years the industry has witnessed weak net inflow in equity mutual funds (see table) and the number of equity folios has come down by from 4.17 crore in March 2009 to 3.76 crore in March 2012.

What did Sebi do?

In a bid to enthuse the distributors,Sebi in 2011 introduced a transaction fee of up to Rs 150 to be paid to the distributor for every investment in excess of Rs 10,000.

Is the industry demanding entry load?

While the distributors and investment advisory associations have been pushing for re-introduction of entry load,Sebi chairman UK Sinha recently said that “There have been suggestions on entry load but majority of the fund houses have not recommended its reintroduction.”

Why the talk of entry load?

The Prime Minister recently said,“There are issues about the mutual funds industry which need to be resolved.” While Sebi is not keen on it,the finance ministry seems to be poised towards it and officials at finance ministry met with various mutual fund heads to discuss on the issue in a bid to revive the industry.

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