By Mahesh Nayak
The 46-strong mutual fund industry is expected to see a whole new set of players, particularly from the alternative investment fund (AIF) and wealth management industry.
As many as five players, including Saurabh Mukherjea’s Marcellus Investment Managers, Nuvama Wealth Management, and AlphaGrep Securities have applied for mutual fund licences with the Securities and Exchange Board of India, according to the market regulator’s website. Recently, Jio Financial (with Blackrock Financial Management), ASK group, Capitalmind and Pantomath have received licences. Sources say Naresh Kothari-led Alpha Alternatives has also applied for a mutual fund license.
Industry sources said that the rush to get licenses has been triggered by the introduction of the specialised investment funds (SIFs) by the SEBI. More importantly, the difference in the treatment of the two instruments is also forcing AIFs and wealth managers to expand in areas where the taxation is more favourable and attract investors who can take more risk at lower investment threshold of Rs 10 lakh, in case of SIFs.
After the launch of SIFs, AIFs, especially Category III and portfolio management services (PMS) are facing an existential threat, as many of their investors could go for such products instead of putting in big amounts of Rs 50 lakh (PMS) and Rs 1 crore (AIF) at one go.
Then, there is the tax differential. Compared to a long-term capital gain tax of 12.5% in mutual funds, AIFs have to pay a much higher tax rate – 30% for resident investors and 39% for non-residents on gains every year.
A senior official at a South-India-based wealth management firm, which manages and advises over $3 billion in assets under management (AUM), stated, “We aren’t getting into retail mutual fund products; the license will be to protect our high networth investors’ interests.”
The wealth manager is evaluating all options and may go in for light touch regulations (SIF) than to seek overall MF license which could help them save time. This consolidation phase of seeking mutual fund licenses is driven by the higher tax burden on a competitive product is similar to a decade ago when PMS firms like Parag Parikh Financial Advisory Services started mutual funds and converted all their PMS clients into clients of their flagship PPFAS Flexi-Cap Mutual Fund.
“Seeking a mutual fund license is also for business advantage, such that we don’t refuse clientele money,” said a senior official from an AIF advisory firm that has applied for a mutual fund license. “Often, due to the closed fund structure, we have to refuse clients’ money, and when we return to them, they have already invested elsewhere. With a mutual fund structure, we can park their money in a liquid fund, and as and when we require to draw down, we can easily transfer the money from the liquid fund to the AIF,” he added.
While Kotak AMC has launched its SIF business, others, such as 360 One, Edelweiss Asset Management, and Quant Mutual Fund, have reportedly also applied to the regulator to start their SIFs. A senior official of a financial service who has received initial approval from the regulatory authorities to start a mutual fund business said,
“Post-COVID, retail and HNIs have registered good gains. While affluent are tapping the PMS and alternative route, the HNI and mass affluent participation have also been growing strongly every day. Despite India trading at a 50-60% premium to emerging market valuation, it still continuously receives flows from these participants. Therefore, it is no surprise that AIFs and PMS, along with MFs, are tapping the SIF market to garner more of the mass affluent and HNI wallet.”