NFOs peter out as investors wise up

MUMBAI:  The Indian mutual fund (MF) investor seems to have grown wiser. He’s not biting the new fund offer (NFO) bait that easily.

Of the top 25 diversified equity schemes — in terms of assets under management (AUM), as on July 31, 2007 — only two schemes launched NFOs this calendar year. 

They were the Fidelity International Opportunities Fund and the SBI Infrastructure Fund Series I. The former currently has an AUM of Rs 1,645.58 crore, and the latter Rs 2,594.77 crore.

During the same period last year, of the 25 biggies, seven schemes had their NFOs in calendar 2006. Clearly, the craze for NFOs is on the wane.

In this year’s list of top 25, 13 existing schemes have grown their AUMs — not just by the mark-to-market gains of the stocks in their portfolios, but through fresh inflows as well.

The AUM of a scheme can vary on two factors: through the gains or losses of the stocks the scheme invest in, and net inflows/outflows into the scheme.

Take the case of SBI Magnum Global Fund 94. It has grown its AUM 175% since July 2006.

Considering that the Sensex has returned 44.74% in the period, a large chunk of the AUM growth would have come through fresh inflows.

Ditto for ICICI Prudential Dynamic Plan. Its AUM has grown 139% since July last year. “Discerning customers have started pouring money into good schemes, and this is mainly coming in the form of systematic investment plans (SIPs). Industry estimates are that Rs 300-400 crore is coming in every month through SIPs,” said Sameer Kamdar, national head of mutual funds at Mata Securities.

Other schemes that have attracted investor interest seem to be Sundaram BNP Paribas Select Midcap, DSP Merill Lynch India TIGER, Reliance Vision, Reliance Growth, Tata Infrastructure Fund and HDFC Top 200.

This is not to say that all funds are attracting fresh money. In fact, most big NFOs launched since January 2006 have been losing money.

Templeton India Equity Income, Reliance Equity Fund and SBI Magnum Bluechip Fund have shrunk in terms of AUM.

Only one scheme launched after January 1, 2006, which figures in the top 25 — Fidelity India Special Situations Fund - has managed to grow its AUM. The growth in this scheme also seems to have come from the growth in the value of its investments rather than new money coming into it.

This shows that despite a rising market, the appetite for these schemes has been there only during NFO period.

Till April 2006, AMCs launching open-ended schemes were allowed to charge initial issue expenses of up to 6% from investors. This could be amortised over a period of five years, and helped MFs pay hefty commissions to distributors.

This, in turn, motivated distributors to give NFOs a greater push than existing schemes on which the commissions were limited to 2-2.5%.

But now, with a Securities and Exchange Board of India (Sebi) ruling in place, fund houses charge an entry load of only around 2.25% from investors from an NFO of an open-ended scheme. However, they have been paying from their own pockets to sell new schemes.

Around 3-3.5% is the commission they give to distributors - probably a reason why open-ended schemes still garner enough money during NFOs.

A reason for AUMs to shrink soon after the NFO is that these schemes are now charging an exit load of 0.5-1%, which is passed on to distributors, encouraging the unscrupulous lot to advise clients to sell.

“Among the not-so-discerning customers, the fetish for NFOs continues,” said Kamdar. “But the good performance of some schemes has made them distributor and investor favourites,” he said.

What the Sebi said
In April 2006, Sebi ruled that open-ended schemes from asset management companies (AMCS) will not be able to amortise their initial issue expenses over five years. Rather, an entry load of a maximum 7% could be charged, and this should reflect in the net asset value (NAV) from the time the NAVs start getting reported.

Earlier, AMCs were allowed to charge investors over five years for the expenses incurred by them in an NFO. Though the new guideline fixed 7% as the upper limit, fund houses believed that charging investors anything over 2.25% would spell doom, and therefore, restricted initial issue expenses at 2.25%.