Could mutual funds see a new wave of investors? Maharashtra has paved the way.

The state government body, established to oversee public trusts including charitable endowments, on 21 July issued a notice stating that trustees of public trusts in Maharashtra could invest up to 50% of the trust’s total money in mutual funds and exchange-traded funds (ETFs), along with other specific investment options.

The key change: trustees of public charitable trusts will no longer need to seek approval from the Charity Commissioner’s office for such investments. The decision of where to invest now rests solely with the trust’s trustees.

Until now, public trusts in Maharashtra could invest in mutual funds only when the trustee had taken approval from the charity commissioner, making the process restrictive due to cumbersome approval requirements.

Currently, 59,143 trust registration applications have been approved in Maharashtra, according to data from the Office of Charity Commissioner, Maharashtra State.

While there is no official data on the total investable surplus of charitable trusts in Maharashtra, market professionals and regulatory observers estimate that the collective corpus of active public trusts in the state could run into several thousand crores of rupees.

“If we assume a mix of donation surpluses, reserve funds, and legacy assets, and 10-20% of those funds being investable under the new 50% limit, a conservative estimate would place the investable potential at ₹5,000-10,000 crore or more over time,” said chartered accountant Gunja Thakrar, core group member, Bombay Chartered Accountants’ Society, who handles matters related to charitable trusts.

In Gujarat, Telangana and some other states, public trusts still have to take approvals from the respective state charity commissioner to invest in mutual funds and other vehicles.

A new set of prospective investors

A few public trusts were investing in mutual funds, but the need for approval discouraged small and mid-sized trusts from exploring such options, said Thakrar. Many preferred to remain in low-risk, low-return instruments such as bank fixed deposits and government securities to avoid regulatory complications, she added.

Aditya Birla Sun Life Flexi Cap Fund, Tata Ethical Fund, ICICI Prudential Large and Midcap Fund, Sundaram Aggressive Hybrid Fund, and a few other mutual funds were approved for public trusts in Maharashtra to invest in before 2000. But since 2000, the approval process has nearly come to a standstill, industry experts said.

As per annualised returns data from Value Research, over the past 10 years, ICICI Prudential Large and Midcap Fund gave returns of 16.57%, Aditya Birla Sun Life Flexi Cap Fund gave 14.69%, Sundaram Aggressive Hybrid Fund gave 12.66%, and Tata Ethical Fund gave 12.48%.

This is far higher than 10-year returns of 8.25% from a State Bank of India fixed deposit. 

More trusts are now expected to diversify into equity mutual fund instruments that may offer better long-term returns, Thakrar said.

“This is a very welcome step by the government of Maharashtra, as in India trust money is long-term,” said Nilesh Shah, managing director and chief executive at Kotak Mahindra Asset Management Company Ltd.

He added that while the Income Tax Act permitted all mutual fund schemes as eligible investment, trusts in Maharashtra were constrained as only few mutual funds were approved as eligible investment. The state charity commissioner’s latest announcement will expand the choice for trusts and allow them to generate better returns, Shah added.

“Charitable trusts usually have long-term surpluses, and we expect bulk of investments to be long-term in nature. There may also be some short-term allocations, depending upon their cashflow needs,” said Suresh Soni, CEO, Baroda BNP Paribas Mutual Fund.

Akhil Chaturvedi, chief business officer and executive director at Motilal Oswal AMC, said the industry could now get a new set of prospective investors to participate in mutual funds across asset classes based on the needs of trust boards.

“We have time and again received enquiries from the trusts expressing their opinion on investing in mutual funds. This development allows us to reach out to them and present various ideas around mutual funds and help them achieve their investment needs,” Chaturvedi said.

Act with caution

Not all trusts, however, would want to invest in mutual funds, said experts.

Trusts registered under Section 12A of the Income Tax Act for tax exemptions must still follow stricter investment rules under Section 11(5), said Rohit Jain, managing partner at law firm Singhania & Co. If these trusts invest outside what 11(5) permits, they risk losing their tax benefits, he said.

Jain added that most public trusts could choose to maintain their exemption status and were unlikely to take advantage of the new relaxed rules. Only a small number of trusts that do not seek tax exemption might benefit, he added.

Soni of Baroda BNP Paribas Mutual Fund said public trusts, especially charitable trusts, are typically risk-averse and may want to invest in only low-risk mutual fund schemes. Also, some of these trusts may have to examine if their by-laws allow them to invest in mutual funds and amendments to these bye laws may take time, Soni added.

Trusts typically need steady income to meet their charitable objectives, said Jimmy Patel, MD at Quantum Mutual Fund, adding that public trusts looking for regular income may prefer systematic withdrawal plans that allow them to withdraw capital gains periodically in a tax-efficient manner.

Despite the relaxed rules, trustees must act with caution, added experts.

“Their fiduciary duty means they are responsible for safe investing and should avoid risky products like small-cap or credit-risk funds, and not follow broker tips blindly,” said Patel.