Not entry loads, but pension plans will revive MFs

Market regulator Sebi (Securities and Exchange Board of India) has told the finance ministry that it is against the reintroduction of commissions paid by fund houses to distributors as entry loads would not benefit investors in any way.

Instead, Sebi has emphasized long-term solutions like pension plans backed by fiscal incentives to encourage investment in equity. A report in the Economic Times said that the market regulator will will pitch for a tax break for long-term pension plans on condition that such schemes are close-ended.

An earlier Firstpost article argued that pension funds investing in equity outperform mutual funds because their fee structure is low, their funds are long-term in nature and mutual funds cost more than pension funds to run.

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“Pension funds do not face sudden surges in inflows or outflows - they are long-term funds meant to build a corpus for employees when they retire. Mutual funds, in contrast, are open-ended investment vehicles - they can see huge inflows or outflows, and both are bad for performance. A fund that got lucky in one quarter may see a surge in inflows and its performance after that will usually fall since so much money will not find profitability opportunities so quickly,” it said.

Sebi has also stressed on two long-term schemes - the UTI Retirement Benefit Pension Plan and the Templeton India Pension Plan - which did reasonably well as both schemes offer tax breaks.

The entry load -2.25 percent commission paid to distributors of mutual funds - was banned in 2009 by former Sebi chief CB Bhave. However the mutual fund industry has attributing the drop in business to this one factor and went head over heels to demand re-introduction of entry load on mutual fund investment as soon as Prime Minister Manmohan Singh empahsised the need to revive the mutual fund industry in India.

But if the entry load is reintroduced, distributors are once again bound to start selling the products to poor informed investors.

As Dhirendra Kumar CEO, Value Research says, the government can do is to enable mutual funds to launch pension plan where money stays locked in till retirement.

In an editorial in the Economic Times, he argues " It would have the same incentives as other retirement-oriented savings and could be transferable between different pension funds. A simple product like this would enable large, sustained and long-term inflows into equities in a way that would be deeply beneficial for the investors as well as for the markets."

Moreover, if inflows to the mutual fund industry has been sluggish, the economic depression globally and domestically is to blame for it. And in a depressed economy no investor wants his money parked in an asset class without earning any return.