[Inside Chodong] The 2% Shortfall in Public Fund Revitalization

[Asia Economy Reporter Junho Hwang] The tragic saga of retail investors (individual investors) continues. The cries of retail investors who gathered every last bit of their soul to invest in stocks, only to be brought to their knees by the towering mountain of monetary tightening, are erupting throughout the stock market. With forecasts that the U.S. tightening stance, which was expected to ease in the second half of this year, will continue, the asset management industry advises turning to indirect investments such as public funds. The financial authorities also announced the "Public Fund Revitalization Plan" on the 29th to strengthen the competitiveness of public funds. The plan aims to enhance the competitiveness of public funds and provide a refuge for retail investors hurt by direct investments.

However, the response from the asset management industry has been cold. The plan strengthens the responsibilities of asset managers while expanding the playing field, but it has been criticized as being like a "steamed bun without filling."

The plan includes a measure requiring asset managers to mandatorily invest 200 million KRW when forming a fund. If that amount exceeds 1% of the investment assets, incentives will be provided. The incentives include relaxing the compliance period for violations of investment limits per asset from 3 months to 6 months and extending the small-scale fund calculation criteria from 1 year to 2 years.

The problem is that few asset management firms are tempted by these incentives. The industry notes that violations of investment limits rarely occur in funds that have been around for less than a year, and such violations can be detected by systems and are usually corrected immediately. Especially from the perspective of small and medium-sized firms that cannot inject large capital, it is pointed out that this plan may exacerbate polarization within the asset management industry.

Even if all these factors are viewed positively, the government has laid out the playing field, leaving asset managers to create playground equipment where retail investors can play. However, it is pointed out that it is insufficient to suddenly gather retail investors who have jumped into direct investments into the public fund arena. Due to the inherent nature of public funds, setting up or redeeming requires a certain period, making it difficult to set up or redeem at the desired time. This is why asset managers say when subscribing to products that "the investment period is more important than the investment timing." Also, since public funds are usually sold through distributors, additional sales fees are attached, making the fees relatively high. The inability to check the portfolio daily is also cited as a disadvantage.

The industry believes that despite these drawbacks of public funds, a "plus alpha" is needed for individual funds to flow into public funds. Examples of "plus alpha" include measures to increase expected returns through tax benefits. The income deduction benefits of the KOSDAQ Venture Fund, which will expire this year, or past tax benefits for long-term investment funds, are appropriate examples.

For instance, the "Youth Long-term Collective Investment Securities Savings," which was revised and enacted during the previous administration and could have been introduced immediately, is difficult to understand why it was excluded from this revitalization plan. This product allows young people in their 20s and 30s who newly subscribe to deduct 40% of their annual payment amount, up to 6 million KRW per year, from their comprehensive income.

Temporary tax benefits alone cannot be seen as the solution to revitalizing public funds. However, if the government has drawn its sword, it should present a plan that both the industry and investors can recognize as a direction, which is the way to avoid criticism of merely going through the motions.

This content was produced with the assistance of AI translation services.