The Mutual Funds (MF) industry in India has been growing at an impressive rate for the past few years and this growth has a lot to do with the increasing awareness of the potential this sector offers to investors. For a while now, Association of Mutual Funds in India (AMFI) has been aggressively promoting this sector through various activities. In 2016, AMFI got its new chairman A Balasubramanian who is also the CEO for Birla Sun Life Asset Management Company. He has continued to propel the industry on this growth trajectory and has also built up momentum for the awareness campaign. Balasubramanian is also a member of the Mutual Fund Advisory Council set up by SEBI (Securities and Exchange Board of India). He spoke to Free Press Journal’s R N Bhaskar and Jescilia Karayamparambil on some key highlights of this industry. Given below are edited excerpts:
What is your take about the tax regime—GST?
- From AMFI’s point of view, there won’t be any adverse impact from GST on the mutual fund industry. There would be changes in terms of compliance because in the past as well mutual funds are subjected to service tax (ST). So now we will be moving to GST. Mutual funds will come under the 18 per cent slab compared to 12 per cent under ST. This is same in case with many goods and services in the country. For some the rates have gone down and some it has gone up.
GST will not hurt the mutual fund industry. But it will increase the compliance cost. At the same time, the transition to GST will also result to lot of automation. GST would depend on individual adaption. If you are able to adapt to GST well, it will improve efficiency, increase collections and it will allow for frequent monitoring. Interlocking will be the key here. Interlocking will make the process run like an engine.
In order to create awareness about GST, AMFI as a body is carrying out a conference call which will have all our members across the country express their concerns. Through this process, we want to see if our members are well aware of the various aspects of GST. We are also trying to reply to all the queries individually if they contact AMFI through AMFI’s website.
Will GST affect commissions that the industry pays out to intermediaries?
- Every person who is providing and taking services will have to pay his or her share of GST. Service Tax is gone up from 15 per cent to 18 per cent now. That system will not change. An unregistered agent will get his commission after deduction of the full service tax amount. But he will not enjoy the input credit. This is a smart move which will encourage every player to register himself with AMFI and GST. This will not leave anyone unattended. Therefore, compliance through this system will go up significantly.
How has growth been for mutual fund industry?
- From the AMFI’s point of view in the last three-four years, we have seen continuous growth. We have also seen continuous growth in equity and have seen increase in participation in various mutual fund schemes. The growth of the SIP business is impressive, and its book size is also growing. We have seen 3.5 per cent growth month-on-month in SIP alone. Overall, we are growing 2 per cent month-on-month – that is almost 24 per cent on an annual basis. This rate of growth is bound to be maintained keeping in mind the penetration (into smaller towns and villages). The major driver to this growth is the mutual fund awareness that has been created. AMFI has been rolling out various awareness campaign across the country.
The awareness to invest in mutual funds has been growing. This will cause more and more participation from the middle class. This group is looking at mutual funds as a long-term vehicle. We have seen an increase in SIP and we have seen a new trend emerging – a move from a short term approach to MFs to a long-term perspective.
Is there any pain point or a wish list that you want the government to look at?
- We only had an opinion about KYC (know your customer) and we had pointed it to the government that asking a client to go through a KYC each time was cumbersome. But with a centralised approach to KYC coming in through CKYC, many of these problems could be ironed out.
Is it foreign fund inflows that are causing the stock markets to rise? What is your view?
- Today, FDI (foreign direct investment) flow is higher than FPI (foreign portfolio inflows). FPI flows in the last two years are lower in the capital market than domestic flows. From India’s point of view, this is good news. It means more domestic money is now supporting the market. Hence the December effect (when foreign investors take their money out towards the end of the year) is likely to be less severe than it used to be earlier. FDI flows into the bond market has been rising as India is considered as a stable market with regards to currency concerns. Project led investment has started generating inflow.
The flow is more qualitative and long-term in nature unlike what happened three years ago. From the market point of view, the biggest advantage is that domestic savings that would otherwise find a way to real estate, gold and banks, are now moving towards the capital market.
There are talks about dividend tax. Is AMFI in talks with government on this?
- Our consultants have given us an opinion about this. Any dividend received from the companies on the equity holding by mutual funds, is subjected to the provisions of Section 10(23B). Under this provision, things are clear. The final investor will be exempted from dividend tax. Both the mutual funds industry and investor are protected.
The clarification that we have received from our consultants has been forwarded to the CBDT office and to the finance ministry. We have informed them that we are going by what has been advised to us by our consultants.
How can the hidden nature of commission in MF be improved?
- In last few years, the commission has been streamlined. Industry body as part of best practises has streamlined the whole process. There will be some deviation by some members or distribution. Some still have to be streamlined over a period of time.
What is AMFI’s stand on churning of accounts?
- Churning is coming down. Most of the commissions are long-term. The higher the upfront, lower the churning and lower upfront, more the churning. The incentives have been structured in such a way that it encourages a long-term holding period.
Which states are the biggest contributor in the MF industry?
- Maharashtra is the biggest contributor. Most investors are based in Maharashtra and the per capita income is highest in the state. Next comes Andhra Pradesh, Gujarat and Tamil Nadu.
What would be Birla Sun Life’s target?
- We want to be the leader in this space. If the industry grows by 15 per cent, we would like to grow by 16-17 per cent. We want to grow a little above the industry growth rate.