 
Prashant
Jain ANOOP
BHASKER RITESH
JAIN |
The new Fund Order N Mahalakshmi Mutual
funds may have mopped up huge sums through new launches but ironically
both the industry and investors have been net losers The mutual fund industry crossed a major milestone in August this year with total assets under management growing to over Rs 3 lakh crore. This could appear like a giant leap. But not quite. While debt funds saw redemption amid uncertainty over interest rates, fresh money hardly came into equity funds. Collections in most new fund offerings looked impressive but again, these came at the cost of existing funds. The primary driver of assets this year was fixed-maturity plans which became a rage thanks to their unbeatable combination of low volatility and tax efficiency. The diktat by the Securities and Exchange Board of India last year to rechristen initial public offers of mutual funds as new fund offers made little difference. That is because several funds, not all though, were busy serenading investors with launches, exploiting the myth about anything at par value being perceived as cheap and, hence, attractive. Take a look at the numbers. Between January 2005 and August 2006, about 60 new equity schemes were launched, mopping up Rs 53,000 crore. During the same period, actual assets under management in all equity schemes went up from Rs 33,000 crore to Rs 95,000 crore, indication of a net accretion of Rs 60,000 crore. Pitch this against the Sensex returns of 86 per cent during the period, when the index rose from 6600 to over 12000 levels. The net accretion to equity schemes on account of the gain in value of investments should have been roughly Rs 28,000 crore, taking the total assets to Rs 61,000 crore if funds had done nothing and investors had stayed put. Actually, the net accretion should have been more given that a majority of funds beat the index during the period. In other words, fresh investments in mutual funds have brought in roughly Rs 33,000 crore to the kitty. Compare this with the Rs 53,000 crore raised through NFOs, it is clear that nearly Rs 20,000 crore of money has moved out of the fund kitty in this recycling process. Clearly, this has neither served the cause of investors nor that of the industry. The prime driver for the accelerated pace of new fund launches last year was a regulation which allowed fund companies to charge an initial issue expense of 6 per cent and amortise the cost over five years. Thus, fund companies could splurge on promotions and pay hefty incentives to distributors to drive home new fund sales and charge the same to investors. For investors, NFOs have proved to be bad for several reasons. Firstly, one buys new funds for all the wrong reasons to begin with. Since there is no portfolio or track record to support the cause, it is like playing blind. Secondly, NFOs lead to a significant amount of portfolio churning, often prompted by distributors and investment advisors, which adds to the cost of the investor with little benefit. Thirdly, and the most damaging for the investor who intends to take a long term view: chunk of the money raised through NFOs moves out, as big-ticket investors, prompted by unscrupulous distributors, pocket the incentives and walk out of the schemes. The remaining investors, thus, have to bear the burden of the initial issue amortisation cost, which owing to the shrunk corpus, works out to more than 6 per cent – at times as high as 10-12 per cent. An analysis of NFO data since 2004 throw up some startling figures. Of the 42 equity schemes launched in 2005, 32 saw their assets deplete by August this year despite the rise in the indices during the period. Even more, over 60 per cent of equity funds launched during 2004 lost over 50 per cent of their assets by August 2006. Similarly, 58 per cent of funds launched during 2005 lost over 50 per cent of assets. One caveat to this analysis could be that some funds may have seen a depletion corpus because of dividend payouts, but the instances of huge pay-outs were few. Again, the fall would have been sharper if one considers that portfolio values would have gained given the rising market. The important point to note is that a 50 per cent depletion in the corpus would mean that the amortisation cost doubles for the remaining investors, underscoring the damage caused to them. If one thought all this would come to an end after the regulator disallowed open-ended funds from amortising initial issue expenses, mutual funds are once again skirting the system by launching closed-end funds with frequent exit options under the garb of liquidity. Is
this a sustainable proposition? And what can investors expect from
mutual funds in terms of new products, especially after Sebi has
given the go-ahead for new products such as real estate, gold and
capital guaranteed schemes. It is keeping these issues in mind that
we decided to focus on the future of NFOs as the topic for discussion
in this year’s Fund Cafe. Read on to know what the fund managers
have to say.• HOME Business Standard • FUND MANAGER • October 2006 |