New equity offers by MFs near record high

45 NFOs have hit the market this year, compared to the highest-ever 48 in 2007

It’s raining equity new fund offers (NFOs) this year. So far this year, the Rs 10 lakh-crore-Indian mutual fund sector has launched 45 new equity offers, the most since 2007, when 48 NFOs (the most so far) had hit the market.

In terms of asset mobilisation, however, fund houses have managed to raise only Rs 6,426 crore, about a fifth of Rs 29,284 crore raised during the peak of the bull market in 2007. Nevertheless, the amount garnered this year is the highest since 2008. In a way, it marks a reversal of fortune for new mutual fund products, which had lost favour among investors in recent years. A sharp increase in stock prices through the past year, as well as good returns generated by existing mutual fund schemes, has helped regain investor interest.

Following the global financial crisis of 2008, investor appetite for mutual fund schemes had taken a hit, amid a sharp drop in the stock market. In 2012, only eight NFOs had hit the market, raising a cumulative Rs 503 crore, the least since 2003.

Most of the NFOs launched this year are close-ended schemes, with a lock-in of three to five years. Of the Rs 6,426 crore raised this year, 80 per cent, or Rs 5,000 crore, has been mobilised through the close-ended route. For close-ended NFOs, mutual fund distributors enjoy higher upfront commissions — up to eight per cent. Last month, the Securities and Exchange Board of India had criticised the practice of paying steep commissions to distributors. The regulator was concerned higher upfront commissions could encourage miss-selling of products and result in unnecessary churning by distributors.

H N Sinor, chief executive of the Association of Mutual Funds in India, believes commissions are necessary, but the sector has to strike a balance. “I do not deny there is an acquisition cost. But we have to be reasonable. Mostly, I hear people in the sector talk about what to do for distributors. People must also keep investors in mind,” he said.

Companies expect the momentum seen in the launch of new mutual fund offerings to continue, as the stock market is expected to provide steady returns through the next few years. Niranjan Risbood, director (fund research), Morningstar India, believes the market has improved and people are willing to put in fresh money.

“As most of these funds are close-ended, with much better commissions, distributors are also pushing these products to investors. I believe this will continue, as new launches are an easy way to get money in a rising market in India. There will be more such funds with lock-in periods,” he said.