Reforms set to to boost Russian mutual funds industry

The Russian Ministry of Finance and the Moscow International Financial Centre working group are preparing a number of legislative changes in the hope to increase interest in the Russian mutual fund industry among local investors. Keen to diversify the national gross domestic product away from energy and oil, it is turning its attention to the financial industry.

Since the financial crisis in 2008, the growth of the mutual fund industry has been thwarted by loss of investor confidence.

Vladimir Kirillov, chief executive of TKB BNP Paribas Investment Partners, said: “Many fund investors lost a lot of money during the crisis. Often, the risk profile chosen for them was incorrect, since consulting services are still underdeveloped in the country.”

Government reforms have not helped. Instead of facilitating allocations to Russian mutual funds, new legislation introduced taxation of real estate holdings in funds, putting them on par with corporations.

Now Moscow is keen to reverse the damage. Discussions are underway to abolish the 13% personal income tax, which investors pay when buying or selling mutual funds. Although this will not be a game changer, Kirillov believes it will make funds a more appealing investment option.

It will also make them more competitive with bank deposits, which are attracting money from the mutual fund industry due to high local interest rates. When putting money in a bank account can yield 9%-10% a year, well above 6%-7% inflation, there is simply no incentive to look at other investment options.

Another new law expected to come into force at the start of September will allow asset managers to consolidate funds, which will reduce management costs without losing out on allocations. This may also improve the efficiency of the industry and create larger funds that have more investment options.

Kirillov highlighted another problem – the lack of fund types on the market. “There are practically no money market funds in Russia. If in Europe they hold 80% of all assets, in Russia it’s less than 1%,” he said.

But the main issue is not the lack of investment options, but rather lack of distribution channels. “Only very few banks have distribution channels as their business model. International banks are probably the best agents at the moment. Local banks are focused on deposits.”

 

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