Passport For Mutual Funds: How Will It Benefit You?
Have you ever thought about investing in companies like Alibaba Group Holdings, Samsung Electronics, Tencent Holdings, Taiwan Semiconductor, etc.?
If yes, then your wishes may come true. You may soon be able to invest directly in schemes of mutual funds registered in Singapore, Thailand, or Japan. The investment abroad will come with the same standards of performance and protection. At the same time, Indian fund houses too, will be able to market their schemes in neighbouring Asian countries, without having to register there.
Mutual Fund “Passporting” (also known as fund passport), once implemented will allow cross-border marketing of managed funds across participating economies in the Asian region.
According to a report in Business Standard, the Securities and Exchange Board of India (SEBI) is working with other Asian regulators to allow the fund passporting of Indian funds. However, there is no confirmation on this from the SEBI.
This is not the first cross-border mutual fund initiative in the Asian region. Three other cross-border mutual fund arrangements are currently in place. In August 2014, the ASEAN Collective Investment Scheme (CIS) framework, between Singapore, Malaysia, and Thailand took form. Nearly a year later, The Mutual Recognition of Funds between Hong Kong and China was established. Now, an initiative known as the Asia Region Funds Passport (ARFP) includes a wider participation. Australia, along with a few other Asian countries, is set to launch fund passport by December 2017.
In 2016, Finance Ministers from Australia, Japan, Korea, New Zealand, and Thailand signed a Memorandum of Co-operation on the implementation of the ARFP. Singapore chose not to participate in the MoC due to concerns relating to the unequal treatment of tax. Activation of the Passport will occur after any two participating economies complete the implementation.
However it is not clear whether India will join an existing fund passport arrangement or whether it will form a separate group.
But there are some regulatory hurdles too…
The establishment of a fund passport faces several regulatory hurdles. As per reports, SEBI has been planning this for over a year. At the same time, it’s important to note that it has taken the countries under the ARFP over six years to come to a mutual agreement.
According to a PWC report, fund passport initiatives face several barriers in an extremely fragmented Asian fund industry. Countries in Asia have different tax and regulatory requirements, with no single coordinating regulatory authority.
Ernst & Young reports several challenges of the fund passport scheme as outlined below:
- Tax arrangements: Both at a fund and investor level, the different tax regimes create a major hindrance. Under the ARFP, foreign funds offered to investors in a jurisdiction are subject to similar tax treatments as funds managed locally. Hence, this led to unequal taxation for an asset manager in the home country and abroad.
This was why Singapore did not go forward with the ARFP, as it has relatively benign tax laws, and expected the same treatment for their asset managers abroad.
- Regulatory framework: There needs to be a strong and consistent regulatory framework. Fund houses, in countries that have stringent regulations, may not show interest. Additional regulatory compliance will be an operational burden for them.
- Data security privacy: Cross-border marketing increases the chance of investor information being transferred between countries, raising the possibility that providers and distributors will need to adhere to a variety of data protection standards. This could lead to further costs and additional compliances.
- Lack of participation: To succeed, the fund passport scheme requires active investor participation. However, investors in most Asian countries may have a strong home -country bias. This is a behavioural phenomenon where the investors have a natural tendency to be most attracted to investments in their home country. Therefore, if mutual funds receive a tepid response through the fund passport, the main objective of having such a scheme will not be met.
The analysts of E&Y assert that the fund passport schemes will need to emulate the success of the Undertakings for Collective Investment in Transferable Securities (UCITS), the European Fund Passport framework. Notably, UCITS funds can be sold to any investor within the European Union.
“It is worth remembering that the UCITS framework took 25 years to reach its current position, and that Asia is more diverse than Europe,” the E&Y report points out. Hence, it may take some time before the strictly regulated Indian mutual fund industry gets to market their schemes abroad. But, when introduced, both fund houses and investors should stand to benefit.
Will it be economical?
Asian fund passports will enable fund houses to increase their market share. This will improve their operational efficiency and is likely to generate significant cost reduction. The PWC report expects Asia-Pacific’s share of High Net Worth Individuals (“HNWI”) assets are poised to increase to $22.6 trillion by 2020, from $4.5 trillion as of June 2015. “The increasing disposable income, growing middle class and young educated population represents the key stimuli for demand of mutual funds in Asia Pacific,” the report highlights.
Over the past few years, SEBI has often raised the topic of lowering the cost of mutual funds to safeguard investors’ interest and help them maximise returns. It was observed that the expense ratio or fees charged by Indian fund houses are much higher than that of global peers. However, fund houses were not in favour of reducing costs, because those with a low asset base will find it difficult to grow, while larger fund houses may find it difficult to manage costs. However, the fund passport will allow funds to grow their market share and benefit from better economies of scale. Hence, both the investors and the fund houses will benefit.
Can it offer a greater investment choice?
As an investor, you will get access to a wider bouquet of international funds. Currently, the offerings are limited. Only few of the bigger fund houses or those with foreign asset managers are offering global fund-of-fund schemes. While there may be nearly 40 schemes available, most of them are concentrated to a specific theme. Only a few are country specific. Thus, this would be beneficial if you understood the risks, and looked to diversify a part of your portfolio.
Global funds may be suitable for diversification, only if the outlook of your domestic economy is bleak, though international investment opportunities might look promising. So, in a sense there needs to be a negative correlation with the domestic market — only then an investment in international equity will support your portfolio. Else, it will be better to give these funds a miss.
The fund passport scheme will certainly add to the mammoth of investment choices available. However you need to choose wisely, keeping tax implications in mind as well. Asset managers will benefit with an international presence that can lead to higher assets. With this, you can look forward to lower mutual fund fees too. But, it may take some time until such as facility is available.
If you are looking for diversification, most Asian markets move in sync, hence global funds would not be the best hedging investment. If you are looking to hedge your portfolio against equity risk or geo-political uncertainties, then gold may still be the best option. It is best to allocate at least 10% to 15% of your entire portfolio to gold and hold it with a long-term investment horizon.
This article was originally published on www.personalfn.com
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