MFs fear loss of tax advantage in debt

A veild threat from the banking regulator has left many mutual fund managers with worry lines. They are beginning to fear that at the advice of the Reserve Bank of India, the government may take the fizz out of certain debt schemes that have helped them fatten their asset book as well as served as a quick money parking zone for corporates and banks.

At a recent conference with money market dealers, RBI deputy governor Shyamala Gopinath hinted that “since MF fixed income products enjoy certain tax exemptions not available to banks”, there may be a case to address this through regulations.

The remark did not go unnoticed in the financial market. Ms Gopinath was referring to the liquid plus MF schemes that give investors a higher return and a clear tax advantage over bank fixed deposits (FDs). For instance, while bank FDs, for a minimum period of seven days, would fetch about 3-3.25% per annum, the return on liquid-plus scheme could be 4.5-5%. Besides, interest income on FDs would be taxed at 33% like any other income, but the dividend distribution tax (DDT) — which fund houses deduct before giving investors the dividend — is at 22% for corporates and 14% for individuals. Dividends can be paid by MFs on either a daily, or weekly, or fortnightly, or monthly basis.

Out of the Rs 7-lakh crore MF corpus, around Rs 2.5-Rs 3 lakh crore would be in various liquid-plus scheme. The central bank’s concern emanates from a crunch that financial markets and the thinly capitalised fund houses may face, if there are rapid withdrawals by large investors as it happened in the weeks after the Lehman collapse. A tax advantage has only deepened the concentration of funds in such schemes.

“It’s a matter that’s more and more catching the attention in recent times,” said Phani Shankar, head of financial markets, ING. But any tinkering on the tax front may have a significant impact on the sector. According to Sunil Jhaveri, who heads MSJ Capital & Corporate Services, a leading MF advisor, “The liquid/liquid plus category will get impacted by almost 15-20% over a period of time. At least individuals will prefer bank deposits (for longer periods) over liquid schemes as there will be certainty of returns and no tax advantage for parking funds in liquid schemes.”

Sensing that the tax arbitrage window may be shut in future, fund houses are preparing their counter-argument. “You can’t compare between FDs and debt schemes. A higher tax on FD interest may be justified since there is an implicit guarantee from the government and RBI that banks won’t fail,” said the CEO of a large asset management company.
‘Liquid plus’, as a product, was designed by the MF industry to overcome the disadvantage in liquid schemes where the DDT was hiked to 28%. While in liquid schemes, the investment happens in money market instruments and the average maturity is 90 to 120 days, liquid-plus schemes hold even more than one-year papers and the average maturity is 170-180 days (which explains the higher return).

Under the present tax regime, all debt schemes, such as short-term and long-term income fund, monthly income, balance fund, gilt and floating rate fund, enjoy a DDT of 22%. But wholesale investors prefer liquid-plus schemes as these generate a higher return.

The MF industry, which is already under strain due to the recent Sebi notification of not charging any upfront load on equity schemes, is closely watching the development. After the adverse impact on sales and distribution of equity-related products, a hike in DDT, they feel, could deal a body blow to the industry. Interestingly, even if the tax rate does not go up, Sebi can make liquid-plus schemes unattractive by making it mandatory for funds to mark-to-market all debt securities with more than 90-day maturity.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/MFs-fear-loss-of-tax-advantage-in-debt/articleshow/5460717.cms

Insurance and investments are not replaceable

The year 2009 was one of the toughest in recent times for distributors of financial products, with challenges ranging from a whimsical market to tightening regulations on commissions. Business Line spoke to the Mr Rajiv Deep Bajaj, Vice-Chairman & Managing Director of Bajaj Capital, one of the leading Indian distributors, to understand how business has coped with the changed rules of the game.

Excerpts from the interview:

With abolition of entry load, as a leading distributor of MF products, have your revenues suffered and how are you coping with the trend?
With the abolition of entry load, we had to change our commission-based model to one based on both commissions and fees.

Though the fee sign-ups have not been numerous enough to make up for the fall in commission revenue, our revenue gap has been temporarily filled up by investors showing greater preference for fixed-income products. Products such as insurance have started contributing more.

We are working hard and are seeing a gradual pick-up in mutual fund volumes. It will be some time before the revenue gap created by the removal of entry load is filled.

Your investors were allowed to buy and sell MF products through your online platform. With both BSE and NSE allowing investors to transact in MFs through their platforms, which route are you asking your clients to take?
We see the exchange platform picking up really soon because of two reasons — convenience (operational convenience) and cost considerations. Out of the total investor population, 20 per cent already prefer using the online platform.

Also, we see 20 per cent of the total business in the next couple of years happening on the exchange platform. There are a few points where NSE/BSE platforms are still to improve — the SIP mode is missing and switch in/switch out is yet to get effective and large transactions (more than Rs 1 crore) are yet to be introduced.

For the above reasons, some investors still prefer to go through online platforms, but with the addition of these features on the NSE/BSE platforms, we hope to see substantial increase in volumes on the same.

What is your outlook for the stock market in 2010? On which sectors are you bullish and what valuation metrics support your view?
The equity market in 2010 is likely to be volatile. The first half of the year is expected to be bullish and the second half would be volatile with a downward bias. Also, foreign fund flows will continue coming to India. US dollar will appreciate, but only in the last quarter of 2010.

We are bullish on disinvestment as a theme. Value investing will outperform growth investing in the next two years.

In terms of sectors, we are bullish on infrastructure, Public Sector Undertakings (PSUs), pharmaceuticals, banking and captive power generation.

The mutual fund top brass claim that, with upfront commissions gone, agents and distributors prefer to sell insurance rather than MFs. What is Bajaj Capital's stance?
Bajaj Capital has always been engaged in providing need-based advice to clients. The need of the client determines what products should go in their portfolio.

Though, in the current scenario, insurance has started contributing more to the revenues we believe that insurance and investment (MFs) are not replaceable, and we try to include both in our clients' portfolios.

What is your advice in MFs and insurance (premium collected)?
Our assets under management in MFs is Rs 6,000 crore. In the coming financial year, the annual insurance premium routed through us will be more than Rs 250 crore. On the Mutual Fund assets side, the average age does speak for our long-term investment philosophy, it is comparatively higher than most players in the market.

With the stock market already at a yearly high what funds do you recommend to your investors?
We recommend that our clients have a balanced portfolio consisting of equity, debt, cash, real-estate, etc, i.e. all asset classes should be included.

Depending on the market levels, the mix of these assets undergoes a change. Presently, we are neutral on cash and gold, underweight on debt and commodities and overweight on equity.

If investors want to invest in MF and come to you for advice do you charge them, if so on what basis?

On August 1, we had rolled out our four fee packages out of which one — the transaction package — is free of cost and the other three are fee-based packages costing Rs 2,500, Rs 5,000, and Rs 7,500. In the transaction package, there is no charge for buying, selling and switching.

Thus, it is virtually free for the investor. In paying Rs 2,500 (Advisory Package), the client receives consolidated portfolio statement once a month, tele advice, other statements once a year.

In case one pays Rs 5,000 (Premium Package) as fees, apart from the above mentioned services, there will be portfolio construction as well as quarterly portfolio review.

If one pays Rs 7,500 (Financial Planning Services), apart from the above services, a personalised Financial Plan will be prepared, presented and implemented and will be regularly reviewed once in a half year.

Alternatively, customers can pay us a percentage of their portfolio.

This ranges from 0.25 per cent to 1 per cent, depending on the assets that a client maintains with us.


Bajaj Capital talks about financial planning as a concept. Have clients taken to this?
There are approximately a lakh investors who have availed our financial planning services. Now after the changed regime in Mutual Funds, accountability on the part of advisor has definitely increased and clients also have become demanding. We do not limit our Financial Planning to products only. Our recommendations relate to the goals, needs and wants of the client, thus non-investment related issues such as pre/postponement of goals, loans, emotional attachment to goals, also form part of the discussion. In terms of investment products, we cover mostly all products under our Financial Planning — such as Mutual Funds, Life Insurance, Asset Insurance, Health Insurance, disability & accidental insurance, fixed return instruments, equity share investments, facilitating property purchase at major locations in India, etc. We anticipate a very good growth for this business over the next few years. At Bajaj Capital, 60 per cent of our revenues are from clients who have used financial planning services.

Source: http://www.thehindubusinessline.com/iw/2010/01/17/stories/2010011750150500.htm