NFOs fail to click for funds

In spite of all the hoopla surrounding new fund offerings (NFOs) by mutual funds this year, the year-to-date collections this year is much lower than last year's figures. This year, mutual funds collected about Rs 12,000 crore through NFOs, lower than the January-August figures in 2006.

This year (January to August) saw a total of 54 NFOs garnering Rs 15,409 crore, whereas in the same period last year, the fund houses collected nearly Rs 27,000 crore. The figure is more significant, considering that NFO collection in August 2006 was nil.

DSP Merrill Lynch and Reliance Mutual Fund launched the largest number of funds this year "" seven each. A majority of funds launched in 2007 were open ended, which has also broken the 'myth' that closed-ended funds give better returns because of a three-year lock-in. It also signifies investors' choice for more and more open ended funds as it gives them a freedom to redeem their investment any time.

Infrastructure, mid-cap and offshore investment have been the main theme of funds launched this year. A lot of fund houses came up with global schemes.

Says Samir Kamdar, country head of Mata Securities: "This year, the market went into a correction mode hurting equity NFOs. The market has been more or less volatile, first in February, then in July. Then in March, interest rates shot up, so the overall environment was not very conducive for new fund offerings. But, I think, if the market remains stable, it can exceed last year's figure."

An average mutual fund investor has surely gone wiser as the craze for new fund offers does not seem as exciting. Experts point out that systematic investment plan (SIP) has come as a blessing for small investors, who try to buy into a fund during the NFO period because one can get the units cheaply.

But now with a SIP in place, one can invest a certain portion every month into any fund. Industry estimates are that Rs 300-400 crore comes into SIPs every month.

Mutual fund houses have been cashing in on new fund offers as an effective marketing gimmick which has even surpassed the money flowing into existing schemes.

It has also been seen that assets under management of open ended schemes shrink soon after a fund is launched. One of the main reasons for AUMs to shrink soon after the NFO is that these schemes are now charging an exit load of 0.5-1 per cent, which is passed on to distributors, encouraging the unscrupulous lot to advise clients to sell.

Many investors are in a misconception that investing in an existing scheme at a higher NAV is riskier than investing in a NFO.

Says Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund: "This year we saw some big ticket IPOs which soaked the retail money, but having said that investors are now moving up the financial knowledge curve. A well-informed investor always goes by the track record of a particular fund. It is only the fencesitters who go by distributors' words. Traditionally, we have been seeing existing schemes faring better than NFOs. AMCs want to bring in more focus and that is why they launch a new fund or even existing fund with fresh advertising and campaigning."