Our Christmas Wishlist For Santa

We’ve finally arrived at the close of the “festival season”, we’ve arrived at Christmas! This festival, being so close to the year’s end, is synonymous with party time for one and all.

The most thrilling part of Christmas is Santa Claus, never mind if mythical, who goes about distributing gifts for all the good folks everywhere. Kids seem to love the large, jolly, white-bearded man in red carrying a loaded sack of presents. And as adults we can still look up to Santa as the symbol of cheerfulness, hope and generosity.

At Quantum, we just finished making up our mind on what presents we’d like this Christmas. It’s 24th already so we had to keep our wishlist short and crisp. Santa and his reindeers must now be on their way but we hope our list reaches them on time...

Increased awareness of mutual funds among the masses

Mutual funds are investment products for planning long term goals like retirement, child’s education, home buying etc. However lack of proper understanding of mutual funds as a product has left it still unpopular in our country, with the exception of the urban areas.
In the 10 year period from 30 September, 2004 to 30 September, 2014 diversified equity funds gave an annualized return of 20%, based on Crisil-AMFI Diversified Equity Fund Performance Index. Surely mutual funds can find a place alongside EPF, PPF, and NPS for the very long term investments.

So the first on our wishlist this Christmas is that the awareness of mutual funds would penetrate more and more households. That there will be sufficient education and confidence in individual investors to choose and invest wisely in equities, bonds and gold through mutual funds.

Equal treatment for equity fund of funds as equity oriented funds

The new Union Budget presented in July 2014 brought in a couple of changes in the tax environment of mutual funds. The holding period for long term capital gains (LTCG) was increased from 12 months to 36 months. The LTCG tax rate for non-equity funds was raised to 20% from 10%. These moves were taken to eliminate the tax arbitrage between FMPs and Fixed Deposits. However it ended up doing more than just the intended good.

We wish that there will be a distinguishing between fixed income funds (or debt funds, in other words) and other non-equity funds. Presently all non-equity funds like multi asset funds, gold funds and especially equity fund of funds are treated as debt funds. However in our view, an equity fund of funds should be treated as an equity product since all the underlying funds in the portfolio are all equity funds after all.

Equity fund of funds is a product where a fund manager chooses other funds in which he invests after thorough research and analysis of all the available equity funds. The unfavorable taxation is unfair for investors and it overshadows the attractiveness of the product.

A better measure for seriousness of AMCs
And finally we wish to Santa that in the days ahead mutual fund Asset Management Companies (AMCs) will stopped being judged of their “seriousness” of doing business based on their size...the size of their net worth and size of the assets under their management (AUM). Instead their credibility will be acknowledged for how good they are at managing investors’ money, their investor-centric approach, and their innovations that make the investing experience easier and within the scope of the masses.

Investors may tend to prefer larger funds because we have a natural affinity for and a perception of safety in, bigger companies. If they’re big then they can’t get away doing nonsense because they are seen by all. They would adhere to standards better. And so on. However it needs to be explained that these valid considerations do not really hold in the mutual fund industry that is so closely regulated that it is hard to commit faults and get away unnoticed. Irrespective of size all AMCs need to abide by all the rules laid down.

It is sad enough that a large majority of the distribution and advisory communities tend to believe that small is bad or small is unhealthy or unsafe. By their own admission, they squarely refuse to sell or recommend funds smaller than a given AUM or funds coming from an AMC managing a total of less than a given AUM. But this year’s regulatory move which has raised the net worth requirement of AMCs from Rs 10 crores to Rs 50 crores came as the hardest blow.

As of date, this year 2 smaller AMCs have been taken over by bigger ones following this changed regulation. In our economy, where inclusiveness is being stressed as the need of the hour in the financial sector, it beats logic why new laws are enacted that curb the number of players in the industry that needs better promotion.

We hope that Santa will not disappoint us on our 3 simple wishes, just like he never does for all the nice ones who’ve been good in the year!

If you were to present a wishlist on investments to Santa what would you include in it? Share your thoughts with us at [email protected]. Wish you a merry Christmas!

Above article is authored by Quantum.

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