Revival of equity NFOs still doubtful

Number of equity launches is on the rise; but trend may not continue

After new equity fund launches hit a decade-low last year, such new fund offers (NFOs) have made a smart come back so far this year, as benchmark indices hover at historic peaks. Not only have the number of equity NFOs doubled but they could also mobilise more than three times the funds they collected a year ago.

In 2012, the fund house sector came up with just eight equity new launches and collected a little over Rs 500 crore in all. In 2013, there have been 14 NFOs so far (a couple of more are scheduled to be closed this month), which mopped a sum of Rs 1,532 crore.

Is the lull in the NFO market set to end?

Though the statistics look encouraging, when one goes deeper, it appears the situation continues to remain worrisome. Of the 14, four NFOs were close-ended products from the stable of fund houses like IDFC, ICICI Prudential, Axis and Union KBC, while six others were Rajiv Gandhi Equity Saving Schemes or RGESS from Birla Sun Life, DSP BlackRock, HDFC, IDBI, LIC Nomura and UTI.

These 10 launches, put together, cornered the lion’s share of Rs 1,100 crore or over 70 per cent of the total assets. The rest four managed a paltry collection of Rs 190 crore. This is where the worry lies.

Dhruva Chatterji, senior investment consultant at Morningstar India, said, “It’s the close-ended products that have raised the majority of the funds. We have to wait and see how these funds do and keep up with their reputations.”

Otherwise, Chatterji said, there was less hope for revival of NFO market unless until there was retail investors’ conviction in stock markets, as markets see realistic moves.

“Besides, strict regulations from the regulator might also continue to have implications on equity NFOs,” added Chatterji.

According to industry experts, so much money in the close-ended products was a function of high-up front commissions paid to the distributors.

Akshay Gupta, chief executive officer of Peerless Mutual Fund, said, “Commissions payout play an important role for revival of NFO market. However, the markets have to sustain its strength.”

It appears true, as despite several measures by the Securities and Exchange Board of India and the Association of Mutual Funds in India, mutual fund continues to remain a “push” product. Amid this, fast revival of NFO market looks difficult unless fund houses have deep pockets.

Sundeep Sikka, CEO at Reliance Mutual Fund, said, “I don’t know whether the NFO market is set to grow. But, we plan to come out with close-ended products with tenure of even 10 years. These would be long-term value funds with regular dividend payout options. The objective of the move is ‘concept selling’ and change investors’ investment behaviour. In the open-ended schemes, investors are not showing discipline of continuous investment.”

Between 2005 and 2008, industry had launched 171 equity NFOs and collected Rs 1.12 lakh crore. However, since then, the magic of new equity launches lost sheen, as global stock markets collapsed post Lehman crisis. In 2012, the number of equity NFOs dwindled to eight.