India's MF industry gets 'average' grade on regulation and taxation

Morningstar says fund governance strong positive, bundled fee structure can be reviewed

The sixth edition of Global Investor Experience Study by Morningstar -- which assesses individual mutual fund (MF) markets in terms of investor-focused global best practises -- has given ‘average’ grade to India on regulation and taxation.

The study put India in the 'average' pack of countries, which is higher than the grade received by developed countries such as the US, Australia, Japan and Canada. Of 26 markets reviewed for the study, 6 were placed in a higher grade (i.e. top and above average) than India. These included the Netherlands, Sweden, the UK, Belgium, Finland and Norway.

Citing various positives in the Rs 23 trilion domestic MF industry, Morningstar said that India matches global best practices in several areas of regulation, including supervisory board with independent representatives, publishing of regulatory sanctions and controls on fund advertising.

Further, the tax system incentivises fund investing, including deferral of capital gains taxes until units are sold.

The study pointed out that there was room for improvement. “The strength of fund governance in India is offset … by some of the market's weaker policy and operational attributes, like a lack of mandated saving via Tier I retirement accounts for nonstate employees and fund structures that charge investors asset-based fees to cover the costs of distribution,” it read.

Morningstar has been a strong advocate of unbundled structures, where distribution commissions are not embedded into the overall fund expense ratios.

Among other areas for improvement, the study said, “Also, there is no explicit investor compensation scheme to protect fund investors in the case of fund company wrongdoing or corporate failure."

In the first chapter of the sixth edition on fees and expenses, India’s grade on fees and expenses had improved from ‘below average’ to ‘average’ in 2019.

This was on the back of scrapping of upfront commissions, new limits on total expense ratios and scheme re-categorisation norms laid down by the Securities and Exchange Board of India.