ULIPs to gain from PAN compliance

Next year, the domestic mutual fund houses may see a slowdown in fresh inflows into their schemes, following a requirement that make it mandatory for all investors to quote their Permanent Account Number (PAN), the alpha-numerical number provided by the Income Tax Department, for all new investments in mutual fund schemes.

Industry officials anticipate a shift in investments into Unit Linked Insurance Plans (ULIPs), where PAN is not required for investments up to Rs 50,000.

Market regulator Securities and Exchange Board of India (Sebi), through a circular issued in June this year, made PAN the sole identification number for investors. PAN has been made mandatory for all transactions effective from January 1, 2008.

At the moment, any person intending to apply for a mutual fund investment, can go ahead and make the investment without PAN, provided she/he provides evidence of having applied for a PAN, along with the application for investment. However, according to Sebi, effective January 1, 2008, submission of PAN would be mandatory for all transactions.

Distributors are not worried as they are confident of making up the loss of business by selling more ULIPs. An ULIP is a financial product that offers life insurance as well as an investment like a mutual fund.

The assets of domestic mutual funds (34 fund houses at the moment) currently stands at over Rs 5.5 trillion (or Rs 5.5 lakh crore) while 16 life insurance companies are estimated to have invested Rs 1,50,000 crore into the equity markets this year alone.

Clearly mutual funds have a problem in their hands. Lotus India Mutual Fund CEO Ajay Bagga said, "There are 32 million mutual fund folios in India and the number of PAN card holders is just 4 crores. At a time when we talk about lower retail participation into capital markets, we will have to take this issue into account. Banks are already complying with the Know Your Client (KYC) norms, so why do mutual fund investors need to get a PAN again."