About a couple of weeks have passed since our Prime Minister has taken over the reins of the finance ministry, and during this whole time, the Indian mutual fund industry has been abuzz with the expectations of a major revival. Dr Manmohan Singh has gone on record to say that he aims to revive the issues concerning the state of the fund industry in India, which leads me to ask the question? What really is the problem with the Indian mutual fund industry?
There is no questioning the fact that the mutual fund business is suffering from poor conditions. It is true, and I really do believe that mutual funds haven?t achieved the kind of scale that they can as an investment vehicle. Not enough Indians by any means are looking at mutual funds for what they are: an ideal way to participate in the long-term growth of the economy that also enables them to save regularly. Why is this so? I believe that the answer lies somewhere in the last sentence of the paragraph before this. The key, for me, is the term ?long-term?. When it comes to putting in their money for the long-term, for a period of five to 10 years or more, the last thing that Indians think about is equity, which is actually the first thing that they should be considering. Long-term retail equity investment has never been a part of our culture. Equity has always been an opportunistic medium to make quick money.
Now, I don?t mean to say that Indians don?t invest in equity for the long-term; we do, but only a small percentage of us. This is the fundamental problem that plagues the mutual fund industry. When we are in the midst of a bull run, people will want to be a part of it. But when it comes to saving systematically, a majority of us tend to prefer safer havens like savings accounts and fixed deposits. The interesting thing about this is that investors can?t even be blamed for this, because the past few years haven?t allowed any investor to experience any sort of meaningful gains from equities.
So then, how does one bring Indian investors to long-term equity investing? One way is distributor commissions, which has taken a backseat ever since the entry load was abolished. So should we bring the entry load back? I definitely don?t think so. Removing the entry load served a definite purpose, the excessive churning of investments to earn higher commissions was something that SEBI was right to try and control. The AMCs themselves launched new funds incessantly in a bid to attract new money. This kind of malpractice didn?t serve investors? interests and getting rid of the entry load was the right way to curb it.
Hence, instead of giving distributors an incentive to sell funds, what the government needs to do is give investors an incentive to stay put for the long run. One way of doing that is allowing mutual funds to have pension plans. A fund?s pension plan would be where investments would be locked in until the investor?s retirement. The government could let investors enjoy the usual benefits of retirement-oriented savings through these plans, and for the sake of transparency, investors could be allowed to switch between the pension plans of different funds. An introduction of such a simple product would enable long-term inflows into equities that the industry and markets seek. From the investors? point-of-view, such a product could well be an ideal retirement savings vehicle.
Going by the happenings of the past few days, the good thing has been that there are no talks about reinstating the entry load. Doing that would be going a step backwards. What the government needs to do is take positive steps forward to take fund investing across the breadth and width of the country.
The writer is the chief executive officer, Value Research