Asset mobilisation by equity NFOs down 28%

Cap on upfront commission dents new scheme launches

Total money mobilisation through equity mutual funds reduced by 28 per cent in calendar year 2015. With cap on the upfront commission payout by the Asset Management Companies (AMCs) to distributors imposed from April, there has been a decline in the number of new launches and the assets garnered.

There were 63 equity new fund offers (NFOs) in 2015, mobilising assets worth Rs 8,816 crore, compared with mobilisation of Rs 12,219 crore through 75 equity NFOs a year ago.

Industry executives rule out any significant improvement in the new launches this year and add that there could be decline, because of the revised strictness by Securities and Exchange Board of India (Sebi) in allowing the new offers.

Kaustubh Belapurkar, director (fund research) at Morningstar India, says, “Generally, new launches are a phenomenon seen in ‘bull market’ period. With scenario changing for markets, I think there will be a further slowdown in NFOs. The regulator has been quite strict and there is a push for mergers of existing similar schemes.”

According to funds industry executives, with Amfi’s and Sebi’s push to strictly follow the Best Practices Guidelines, fewer mutual fund houses will opt for this route to raise assets.

G Pradeepkumar, CEO of Union KBC Mutual Fund, says, “It looks unlikely to have significant increase in the number of new schemes. The product baskets of several fund houses are full which leaves less room for new funds. Sebi has been quite strict and has been pushing for consolidation of existing schemes.”

Sector officials say gone are the days when NFOs were pushed on the basis of higher commissions. Unless there is something that differentiates an NFO from the existing product basket, offer launches will remain low.

In the first four months of 2015, before the cap on upfront came into existence, nearly 25 close-ended equity schemes hit the market, garnering assets worth Rs 3,600 crore. These schemes were front-loaded with commissions as high as 7-8 per cent. Now the cap is at one per cent as upfront, making distributors less enthused about selling new offers to investors.

The impact was well felt in the following months as only 12 more close-ended equity schemes were offered in the rest of the year.

With rising awareness, investors prefer schemes with proven track record. This is well reflected in equity schemes inflows, wherein the existing products with a reasonable performance track record of a minimum 3-5 years are accounting for more incremental inflows. In 2015, total net inflow in equity segment was Rs 90,000 crore. However, the NFOs could garner less than 10 per cent of the total fresh money.

Distributors too are slowly coming to terms with working on trail-based model, which many feel is a more stable business and a win-win situation for all stakeholders — AMCs, investors and the distributors. Currently, AMCs are allowed to upfront the commission to a maximum of one per cent for not more than 36 months. However, it is up to a fund house to pay it or not. Industry officials say there is a risk in giving upfront as distributors can churn investors’ portfolio or the investor may withdraw from the commitment. “In that scenario, we are at loss and we end up like recovery agents from distributors, which is a painful exercise,” says marketing head of a mid-size fund house.

As things stand today, if an advisor brings in a systematic investment plan (SIP) investment of worth Rs 1,000 each instalment, he would be paid about Rs 360 as upfront commission. However, if the investor does not stay for the tenure of 36 months, there is a claw back clause which AMCs can exercise on distributors.