Favourable environment for unit trust funds crucial

PETALING JAYA: As the country braces for the upcoming Budget 2024, one key question echoing from financial circles is what do fund managers wish for?

This question holds significant weight as their aspiration, if considered and addressed, will have the potential to shape a more robust and prosperous economic landscape.

Federation of Investment Managers Malaysia (FIMM) chief executive officer Kaleon Leong Rahan​ highlighted that the unit trust industry has been one of the primary growth components in the Malaysian capital market over the past three decades.

“To date, it offers more than 750 unit trust funds (UTFs) and caters to more than 25 million unitholder accounts, comprising mostly of retail investors,” he told StarBiz.

Considering an estimate of one person holding two accounts, the current 25 million unitholder accounts likely represented a significant portion of 13 million individual investors.

Recognising the widespread participation is crucial when aiming to provide maximum benefit and value to the extensive investor base, according to Kaleon.

Moreover, the ripple effect of empowering such a large segment of the population with investment opportunities has the potential to uplift the economy as a whole.

“As part of the FIMM’s thought leadership and investor protection role, we have been collaborating with the regulators in ensuring that these roles are upheld,” he said.FIMM is actively involved in discussions centred around two pivotal areas.

The first is the exemption of foreign- sourced income (FSI) tax on UTFs, a critical consideration aimed at creating a more favourable tax environment for the funds.

The second focal point involves advocating for the extension of tax-exempt benefits, particularly for fund management companies overseeing Islamic and socially responsible investment (SRI) funds.

On the exemption of FSI tax for UTF, Kaleon said the aim is to rectify the lack of parity.

“Individuals who invest directly abroad are exempted from FSI tax. However, individuals who invest in UTF with foreign exposure are subjected to FSI as the UTF’s foreign income is taxed,” he said.

It’s worth noting that investments might face taxation both abroad and locally, leading to potential double taxation.

Furthermore, the FSI tax proposal is also aimed at overcoming challenges in estimating annual taxes, as funds are mandated to submit these estimates.

“Annual tax estimates are operationally difficult to estimate because the income of the funds is subject to discretionary distribution and outside the fund’s control,” he explained.

On the extension of tax-exempt benefits for fund management companies overseeing Islamic and SRI funds, Kaleon said the FIMM had previously submitted a proposal to the Securities Commission (SC). The proposal sought for an extension of the current income tax exemption for an additional seven years, until 2030, once the current exemption would expire at the end of this year.

Kaleon pointed out the substantial contribution expected from the proposed tax-exemption extension to industry members’ ambitious target of launching 107 SRI or environmental, social and governance (ESG) funds by 2030, aligning with the SC’s own SRI initiatives.

“We have witnessed remarkable growth in the SRI or ESG space, with a total of 58 funds launched between 2018 and 2022, surpassing the initial target of 54 funds for the 2021 to 2024 time frame,” he said, adding that the proposed tax-exempt extension aimed to diversify investment options.

“Increased participation of fund managers in SRI or ESG funds would lead to a wider range of sustainable investment options for investors, catering to varying risk appetites and preferences,” he said.

Furthermore, the extension is anticipated to attract more capital into SRI or ESG investments.

With a greater number of fund managers offering SRI or ESG funds, Kaleon said the increased influx of capital is poised to have a substantial impact on driving sustainable initiatives and supporting ethical companies.

Another impact is the anticipated spillover effect on corporate behaviour. As the SRI or ESG fund market grows, Kaleon expects companies to face increasing pressure to align with sustainable practices in order to attract investment.

Kaleon also expects the extension to foster increased investor awareness, as the expansion of SRI or ESG offerings is likely to promote greater educational awareness about sustainable investing and encourage investors to make responsible investment decisions.

He said the initiative would align with the nation’s capital market development vision of becoming a SRI hub in the region.

“We have ongoing dialogues with the SC and it has been very supportive of our efforts in investor protection and developing the unit trust and private retirement schemes industry,” he added.

Kaleon said the local unit trust industry played an instrumental role in helping investors diversify their investments into various approved investment instruments, with the goal of achieving regular returns or/and capital gains.

Post Covid-19 pandemic, he said retirement savings of many were severely impacted and should be replenished as soon as possible.

“Hence, any impact (of taxes) on the income streams of unit trust funds, particularly those with retirement objectives, will adversely impact the replenishment process,” he added.

FIMM operates on a dual role, serving as a self-regulatory organisation and an industry representative, advocating the development and growth of the unit trust scheme and private retirement scheme industry.

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