The chief executive of the Association of Mutual Funds in India (AMFI), HN Sinor, in an exclusive interview with Moneylife’s Sanket Dhanorkar and Ravi Samalad. This is the first part of a two-part series

Moneylife (ML): There is a move to hike the minimum net worth for asset management companies (AMCs). Some small-sized AMCs are of the view that this move is unfair and prevents competition. What is your view on this?

HN Sinor (HNS): Our view is that 'one-size-fits-all' may not work here because there are some players who want to be niche players. They do not want to be in a game of expanding their AUM size. They say that we are happy with our hundred crore fund so why should they have Rs50 crore of capital. It's not necessary that the seriousness comes only if there is Rs50 crore net worth. But this is one view. The second view is that if your aspirations are different and you want to become very large then perhaps your net worth requirement should be more. But wherever the regulator feels that there are weak risk management practises or AUM size has grown too large, we can look at a different formula. SEBI will have to take a final view on this.

ML: The mutual fund industry has lost around 4 lakh folios in April, however, the overall AUM has slightly increased. Are folios a better gauge of investors?

HNS: Yes. AUM is in a way a misnomer because all equity schemes by and large move along with the index. So automatically your AUM will go up as your equity valuations go up. The correct barometer should be the folio. I am looking at the retail level and not looking at the wholesale side of the business. We are trying to work out something to identify unique customers. But unfortunately the system as a whole has not been able to do it.

ML: If the Direct Tax Code (DTC) were to be implemented, what would be the impact it would have on mutual funds?

HNS: We are making some suggestions to get some relief under the DTC. But I think the major issue is that if certain long-term investments are kept in EEE (Exempt-Exempt-Exempt) category the benefit should flow to the small investor in mutual funds. If they are saying that there will be no EEE hereafter for anyone then I can understand that it cuts across everybody.

But if it's available for one financial product and not available for another one then I think it will not be proper. For a middle-class investor, three to four years of investments must be with mutual funds. Not many people would stay invested for 10 years in a mutual fund. Middle-class people can need money any time. So actually the mutual fund industry should build itself around this segment of the market. Insurance and pension funds are long-term products. The tax should encourage long-term saving. There is no long-term money today in the system.

ML: With the ULIP issue now being settled in favour of IRDA, what impact will it probably have on mutual funds?

HNS: The ordinance is passed. It's a law now. There is no question of dispute on this. I believe that in the next six months we may go through a rough patch because distributors will prefer to distribute ULIPs. There the commission structure is quite different from mutual fund products. So naturally distributors will say 'why should I sell something where I am not earning anything?' In the meantime my hope is that maybe IRDA will further tighten the commission structure.

ML: You also said that commissions are an integral part of this industry. Do you think SEBI will take a re-look at this matter also?

HNS: We have made a proposal but if I think I heard Mr Bhave (SEBI chairman) correctly, it would be difficult. Our job is to keep on trying and their (SEBI's) job is to look at what is best for the investor.

ML: What about Mr Bhave's contention that AMFI needs to play a self-regulatory role?

HNS: We have already initiated that. In fact, a month back, we had a detailed discussion with AMFI's board of directors and later on we also discussed it with the general membership just to get a first-hand sense of how they look at it-positively or not. There were arguments on both sides, but by and large, there was a consensus that we need to do some more work at the AMFI level on what would it be to become an SRO, what are the pros and cons of it, and they have requested us to prepare a paper on this for further discussions. So I think we have taken the first step. We are now getting into the second step and by September 2010 we will be clear about what we really need to do about it.

 —  Sanket Dhanorkar and Ravi Samalad