MF industry, which survived a major crisis after the stock market crash, can grow in the coming years. Excerpts...
Market risk ratings
Until now, we have had only one form of rating for money-market funds — credit rating. Internationally, money-market funds are rated on two parameters – credit rating and market-risk rating. Market-risk ratings are dependent on the duration of the portfolio and the liquidity of the underlying assets the fund holds. While we do not have a full fledged dual rating system in the country, the recently introduced ceiling on the maturities of the fund may be the first step. A dual rating system may make functioning of the industry robust like it has in western countries. But let’s not forget that, even if that is done – you may continue to have problems during abnormal months, like the one we have already witnessed in October 2008. The market risk ratings can only reduce the risk for investors, but it cannot eliminate it completely.
Retirement investment in MFs
Today, only 14% of the Indian population has secured itself with the retirement benefits. However, globally, people have shown a very conscious approach towards securing their retirement needs. MFs have proven to be the best savings vehicles for individuals. Exemplary to this case is the 401(K) plan in the US. Consider this, if you have been putting money into equities since the age of 20, by the time you are 55 you have made a lot of money, irrespective of how the market behaves in between. And, this is what the 401 (K) has done for US investors. It invests into a universe of funds chosen by trustees. Employees are given an option to choose the funds they would like to invest in by allocating a proportion of their savings to the debt/equity depending on the risk appetite. Similarly, in India, too, we have got to allow MFs a greater degree of penetration into financial savings.
Fund of funds structure
As the industry grows, we will see a large number of funds spread across different asset classes. We already have commodities, gold, international, fixed income, arbitrage and equities in India. Real estate products will be available one day and you will see the emergence of fund of funds (FoF). Currently, FoFs have a different tax treatment as to the underlying fund. They should have the same tax treatment as the underlying fund. So, if FoFs are predominantly equity, it should have tax treatment like that of the equity fund, which does not exist. The reforms and regulations have to evolve with the growing markets.
Insurance companies to outsource fund management
Insurance companies have not proven to be good fund managers globally. There thus evolved the practice of outsourcing the fund management to MFs. In India, however, these insurance companies are compelled to manage investments themselves as outsourcing is not allowed. These companies are thus creating inefficient and expensive investment products, without a global expertise in investment management. Call it the outcome of a multiple regulatory environment that persists in out country. There is a complete regulatory arbitrage in India. While there are no issues in having multiple regulators, we should not allow these arbitrages to exist. India should also allow insurance companies to outsource fund management.
Tax benefits
The debt-fund market in India also needs to grow and we need to have a higher degree of retail participation on this front, too, just like the equities. The existing tax benefits, in respect to income and liquid funds, thus need to stay. We, however, would appreciate the dividend distribution tax (DDT) and also the capital gain taxes to come down. In the next couple of years, we are going to enter into an environment of very low interest rates. Hence, if we can reduce the tax element, it would leave higher savings in the hands of the investor.
Market risk ratings
Until now, we have had only one form of rating for money-market funds — credit rating. Internationally, money-market funds are rated on two parameters – credit rating and market-risk rating. Market-risk ratings are dependent on the duration of the portfolio and the liquidity of the underlying assets the fund holds. While we do not have a full fledged dual rating system in the country, the recently introduced ceiling on the maturities of the fund may be the first step. A dual rating system may make functioning of the industry robust like it has in western countries. But let’s not forget that, even if that is done – you may continue to have problems during abnormal months, like the one we have already witnessed in October 2008. The market risk ratings can only reduce the risk for investors, but it cannot eliminate it completely.
Retirement investment in MFs
Today, only 14% of the Indian population has secured itself with the retirement benefits. However, globally, people have shown a very conscious approach towards securing their retirement needs. MFs have proven to be the best savings vehicles for individuals. Exemplary to this case is the 401(K) plan in the US. Consider this, if you have been putting money into equities since the age of 20, by the time you are 55 you have made a lot of money, irrespective of how the market behaves in between. And, this is what the 401 (K) has done for US investors. It invests into a universe of funds chosen by trustees. Employees are given an option to choose the funds they would like to invest in by allocating a proportion of their savings to the debt/equity depending on the risk appetite. Similarly, in India, too, we have got to allow MFs a greater degree of penetration into financial savings.
Fund of funds structure
As the industry grows, we will see a large number of funds spread across different asset classes. We already have commodities, gold, international, fixed income, arbitrage and equities in India. Real estate products will be available one day and you will see the emergence of fund of funds (FoF). Currently, FoFs have a different tax treatment as to the underlying fund. They should have the same tax treatment as the underlying fund. So, if FoFs are predominantly equity, it should have tax treatment like that of the equity fund, which does not exist. The reforms and regulations have to evolve with the growing markets.
Insurance companies to outsource fund management
Insurance companies have not proven to be good fund managers globally. There thus evolved the practice of outsourcing the fund management to MFs. In India, however, these insurance companies are compelled to manage investments themselves as outsourcing is not allowed. These companies are thus creating inefficient and expensive investment products, without a global expertise in investment management. Call it the outcome of a multiple regulatory environment that persists in out country. There is a complete regulatory arbitrage in India. While there are no issues in having multiple regulators, we should not allow these arbitrages to exist. India should also allow insurance companies to outsource fund management.
Tax benefits
The debt-fund market in India also needs to grow and we need to have a higher degree of retail participation on this front, too, just like the equities. The existing tax benefits, in respect to income and liquid funds, thus need to stay. We, however, would appreciate the dividend distribution tax (DDT) and also the capital gain taxes to come down. In the next couple of years, we are going to enter into an environment of very low interest rates. Hence, if we can reduce the tax element, it would leave higher savings in the hands of the investor.
