We often examine the provisions of every Union Budget with a critical eye due to their near-term impact on investors. However, certain structural changes do not lend themselves to instant analysis, due to lack of familiarity. An instance is the proposal to permit foreign resident individuals to directly invest in Indian mutual funds.
The Finance Minister allowed Securities Exchange Board of India (Sebi)-registered mutual funds to accept subscriptions from foreign investors who meet the Know Your Customer (KYC) requirements for equity schemes.This would enable Indian funds widen the class of foreign investors, he added.
The short-term impact - up to a year from now - could be rather muted, for two reasons. One, time taken by mutual funds to set up self-owned global or pan-regional distribution networks or to enter into requisite tie-ups for this. Two, the time taken by relevant authorities, such as
Sebi and the Reserve bank of India (RBI), to release appropriate regulations regarding KYC and other transactional modalities.
Also, it is not that foreigners were prohibited from investing in mutual funds prior to this proposal. But, they had to route their investments through certain Sebi-registered foreign institutional investors.
Hence, I presume those who were keen on the Indian market, primarily high networth individuals (HNIs), have already invested in Indian mutual funds through various permitted vehicles.
Also, to draw a parallel with the Indian debt market, while individuals are permitted to invest in government securities, they prefer the mutual fund route due to the convenience factor. Similarly, only a handful of foreign individuals may actually be motivated to sift through various mutual fund options available and, hence, prefer to continue investing through the foreign institutional investor (FII) route.
Besides, given the current apathy towards emerging markets, it would be optimistic to assume a torrential inflow in the near term. The longer-term impact could be more marked.
POSITIVE SIDE
Better disclosures: While domestic mutual funds are well regulated and are subject to frequent disclosures, they fall short on the quality front, at times. For instance, it is an arduous task to locate metrics such as the tracking error of index funds, portfolio turnover ratios of funds, and so on. These are par-for-the-course in developed markets and the urge to attract foreign money may induce our funds to improve upon the disclosure quality.
Going ahead, we may witness granularity in terms of assets under management (AUM) disclosures viz proportion of domestic and foreign, retail versus institutional, so on and so forth. Such disclosures could be useful to domestic investors, too.
Launch of new products: We could witness the launch of more sector exchange-traded funds (ETFs), inverse ETFs, shariah-compliant products, ethical funds, Real Estate Investment Trusts (REITs) and so on, which may be demanded by foreigninvestors.
This will help broaden and deepen the product portfolio of fund houses available to both, local and foreign investors. Even Sebi may be motivated to show more urgency in evaluating and approving products if it is clear they have a latent market.
Enhanced investor servicing: Foreign retail investors will demand not only better disclosures but also gold-standard servicing capabilities with respect to purchases, redemptions, dividends. While the current standards are good, any incremental improvement could assist domestic investors, too.
Taxation: Currently, the tax regime for Indians investing abroad is not as friendly as for domestic investments. However, one (admittedly far-fetched) hope is that as the foreign influence in Indian funds market increases, we may see some reciprocity in terms of favourable harmonisation of tax provisions for local investors.
NEGATIVE SIDE
Increased volatility of AUM: Currently, a lot of ‘hot money’ is channelled towards ETFs such as Nifty BeES and the Banking BeES. However, due to the structure of ETFs, the actions of a few FIIs have a negligible impact on long-term investors in ETFs.
In the case of open-ended funds, this is not so. Quick turnaround of funds in such schemes hurts longer term investors, as the impact cost of rapid purchase and sale of securities is borne by all investors and not only those responsible for it.
Also, Indian investors should brace themselves for swings in AUM due to myriad (seemingly unrelated) global reasons and not local reasons alone.
The winner’s curse: As in India, foreign retail investors, too, are not immune to chasing recent performance. Also, distributors find it easier to promote the current favourites, as opposed to the laggards. Hence if a mid-cap or sectoral fund is outperforming, it may see outsized inflows.
However, unlike in the case of large-cap diversified equity funds, such flows could hamper fund managers’ flexibility and compel them to either broaden the investment mandate to include more liquid stocks or relatively underperform their more nimble peers due to ‘cash drag’. This, too, could negatively impact existing investors in the fund.
Source: http://www.business-standard.com/india/news/budget-boost-for-asset-managers/427418/
Posts
No comments:
Post a Comment