MFs eye Rajiv Gandhi Equity Savings Scheme

Indian fund managers want the proposed Rajiv Gandhi Equity Savings Scheme (RGESS) to be routed through mutual funds (MFs). Though there is no clarity yet on how the scheme would operate to attract retail investors into the equity markets, industry executives and experts say there is no other vehicle best suited for the proposed initiative except MFs, provided the product is structured well.

But, would mutual fund investments qualify for the scheme, ask market experts. “Often, new investors would prefer to come through the MF route as they may have little knowledge about investing directly in equity markets,” says Rajiv Bajaj, managing director of Bajaj Capital.

In his Budget speech the finance minister made his intentions clear that he wanted to encourage the flow of savings into financial instruments and improve depth of the domestic equity markets. He proposed to introduce RGESS, which would allow new retail investors investing up to Rs 50,000 directly in equities, an income tax deduction of 50 per cent. The scheme would have a lock-in period of three years. Investors with annual income of below Rs 10 lakh would be eligible to reap the benefits of the scheme.

But there are problem areas too, in the proposal. “Who is a new retail investor, and why investments have to be directly in equities?” asks Dhruva Chatterji, senior research analyst at Morningstar India.

Dhirendra Kumar, chief executive officer (CEO) of Value Research, says, “The proposal of RGESS has huge potential to attract funds from retail investors. But it could prove disastrous if new investors put in money directly into equities because of their inexperience. I hope that details emerge, mutual funds are made part of it.”

According to experts, the country’s stock markets could get up to Rs 50,000 crore of retail inflows per annum of long-term funds, which would exceed the funds brought in by foreign investors. The money would not only boost India’s capital markets, but also bring stability as these funds will be stickier.

Sanjay Sachdev, CEO of Tata Mutual Fund, agrees, “If MFs are made vehicles for RGESS, it will be easier and faster as the industry has an established system. This could be a variant of the existing equity-linked saving schemes (ELSS).” There are many takers for this suggestion. In post-Budget conversations with Business Standard, industry chief executives said government has chosen a good time for this product.

If further guidelines favour the MF industry as a vehicle, fund houses would roll out appropriate products, (such as Tata Mutual Fund RGESS or ICICI MF RGESS), they added. With the Direct Taxes Code (DTC) set to come into play soon, ELSS will lose its edge as tax saving havens. “Operationally, it is possible to have the existing ELSS under RGESS,” says Nimesh Shah, CEO of ICICI Prudential Mutual Fund. Moreover, if MFs are made vehicles for the new scheme, investors would have a variety of options to chose from out of the existing ELSS, depending on the schemes’ track record.

Equity mutual funds have the largest investor base in terms of folios. As per statistics from the Securities and Exchange Board of India (Sebi), in January overall equity folios stood at 38.4 million.

Of this, ELSS constitured over eight million.

According to industry officials, since there is a substantial investor-base in ELSS, the proposed scheme should be moulded in a way that existing retail investors in tax-saving equity products can continue under a new name of RGESS.

Source: http://www.business-standard.com/india/news/mfs-eye-rajiv-gandhi-equity-savings-scheme/468301/

MF agents laugh more on the way to the bank

Having been battered by life-changing regulatory moves for over a couple of years now, mutual fund distributors finally have something to smile about. The finance minister has given a significant relief by exempting their services from the ambit of service tax of 12 per cent.

According to a notification on Saturday, the “services rendered by a mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of mutual fund” form part of 34 items exempt from service tax. “The government, being satisfied it is necessary in public interest so to do, exempts the following taxable services from the whole of the service tax leviable thereon under section 66 B of the Finance Act,” said the notification.

Distributors are relieved. K Ramesh Bhat, chief executive, IFA Galaxy, a Chennai-based group of independent financial advisors (IFA), said, “It is big relief. Asset management companies used to directly deduct this 10.3 per cent from the commissions payable. And, since it was not in the nature of tax deducted at source (TDS), we could not even set it off against expenses. Distributors had to bear it all themselves. They could not pass it on, too.”

The move will put more cash in the hands of all classes of distributors, including IFAs, corporate distributors and banks, say experts. For example, an IFA earning Rs 8,970 will earn Rs 10,000 post the changes, Bhat said, adding, “It will 100 per cent help the industry, which is facing difficult times.”

Private banks such as HDFC Bank and ICICI Bank, which earn a significant income through the distribution of financial products, are set to gain, say analysts.

The industry has been facing heavy attrition after the Securities and Exchange Board of India (Sebi) abolished upfront commissions in 2009. Many small distributors either quit or moved to selling other products such as insurance policies and bonds which offered higher remuneration. Even last year’s move by Sebi to introduce a fee of Rs 100 for investments of Rs 10,000 or more has not been able to revive interest amid lacklustre equity markets.

Coming in this backdrop, the Centre’s move will free up cash for expansion at a time when inflows have been erratic, says Rajiv Bajaj, managing director, Bajaj Capital, a national distributor. “The timing could not have been better. Business has not been great for the past three-four years. The service tax was a big drain on our resources. The government move would help us invest in the expansion of distribution,” he added.

Apart from increasing the cash flow in new businesses, MF agents will also take home 11 per cent more on past efforts. Trail commissions, the fee paid by fund houses based on assets contributed by the distributor at the end of the year, will also go up. Amidst a lack of new business, trail commission was a major source of revenue for distributors who hung on.

“Whatever little we were earning on trail used to be shrunk by the service tax,” said Bhat. “We had made a lot of representations soon after the tax was introduced five years ago. But, this week’s relief was unexpected.” The finance minister said in his Budget speech there would be an exemption list in addition to the negative list of services for the purpose of collection of service tax.

Other exempt financial sector services include services of a sub-broker, an authorised person to a stock broker or commodities broker, banking correspondents and business facilitators for insurance companies in rural areas. The government has also exempted services provided by the general insurance industry to some rural economy-focused schemes such as crop insurance, cattle insurance, etc.

Source: http://business-standard.com/india/news/mf-agents-laugh-morethe-way-tobank/468372/

Pramerica, HDFC Asset Bid for Fidelity India Unit, Mint Says

Pramerica Asset Managers Pvt., a unit of U.S.-based Prudential Financial Inc., and HDFC Asset Management Co. are leading the bid for the Indian assets of Fidelity mutual fund, the Mint newspaper reported, citing two people with direct knowledge of the deal.

HDFC and Pramerica have been shortlisted out of about 20 bidders with their bids ranging between 4 billion rupees ($80 million) and 5 billion rupees, the paper reported. The bids value Fidelity at 4 percent to 5 percent of its average assets, the newspaper said.

Source: http://www.bloomberg.com/news/2012-03-19/pramerica-hdfc-asset-bid-for-fidelity-india-unit-mint-says.html