New product launches hit by capping of MF commissions

NFOs halve; amount mobilised drops 68% in 2015-16

New equity product launches by fund houses have seen a slump following the capping of commissions by the market regulator. Only 42 new fund offers (NFOs), together mobilising Rs 4,940 crore, were launched by the Rs 13-lakh crore mutual fund (MF) sector in 2015-16. In comparison, 88 equity NFOs to raise a record Rs 15,556 crore were launched in the preceding financial year.

Industry experts say curbs on commissions paid to distributors, weakness in the secondary market and the Securities and Exchange Board of India (Sebi)’s diktat to fund houses against launching too many products were the key factors behind the drop in NFOs.

Industry body Association of Mutual Funds in India (Amfi), with the backing of Sebi, under the best practices guidelines framework, has asked fund houses to cap upfront commission to distributors at one per cent. Further, the sector has been asked to opt for the trail-based model when it comes to distributors’ payout and do away with the upfront model. The move has tied the hands of fund houses in incentivising the distributors, through whom most of the equity MF products are sold. Year 2014-15 saw an NFO boom as commissions on certain close-ended NFOs were as high as seven per cent.

“The restrictions on commissions have made it unviable for the industry to aggressively launch new products. Distributors, on the other hand, were happy to sell existing products with a decent track record,” said an official with a fund house.

Investor interests in new equity offering were high in 2014-15 thanks to a 25 per cent surge in the benchmark Sensex, which saw the gauge touching an all-time high of around 30,000. Subsequently, the Sensex came off sharply from the highs and ended 2015-16 with losses of nearly 10 per cent.

“Typically, new launches are a phenomenon seen in a bull market phase. With the scenario changing for markets, there could be further slowdown in NFOs. The regulator has been quite strict and is now pushing for mergers of existing schemes that are similar in nature,” says Kaustubh Belapurkar, director (fund research) at Morningstar India.

Industry players said the commissions paid on certain NFOs were so high that it raised fears of mis-selling and forced Sebi to act.

Mis-selling is an act of selling a product to investors without much investment rationale but with the objective of pocketing commissions. Going ahead, fund houses with a bouquet of products might abstain from new launches, say experts.

Experts also say that investors are increasingly preferring schemes with a good track record over new launches. This is reflective in the sales of existing equity schemes. For instance, in FY16, the total sales of equity schemes stood at a massive Rs 1.65 lakh crore. Equity NFOs could make up a mere three per cent of the total sales. In FY15, sales through new offers were a 10th of the overall equity sales.