More new fund offerings to choose from?

Don't make net worth dominant criterion while choosing a fund

Market regulator Securities and Exchange Board of India (Sebi) on Wednesday allowed fund houses that had not met the minimum net worth criterion of Rs 50 crore to launch up to two new fund offerings (NFOs) every year.

While this is a relief to the fund houses, investors could be wary of putting money in the NFOs brought out by these asset management companies (AMCs). That's understandable. Especially considering the primary reason the regulator is insisting on the net worth criteria is to assess the seriousness of the AMCs.

Experts, however, suggest a fund house's net worth should not be the dominant criterion before choosing to invest in a fund. Analysing the history of an asset management company, the performance of its schemes, together with the record of the fund manager(s), are far more important. More, assessing the NFO's investment objective, risk profile and expenses is also important. Besides, an investor could look at the AMC's corporate governance set-up. "If one is convinced about the NFO, there is no need to be concerned about the shortfall in net worth," said a financial planner.

But what if the fund house fails to meet its net worth requirement? Then it could get taken over by another fund house or it could shut shop.

Investors in schemes of the fund house getting acquired are also given the option to exit the funds without paying an exit load. But investors who choose to redeem their units may have to face some additional tax liability. Those redeeming their equity units before one year, will have to face a 15 per cent short-term capital gain tax. Debt-unit holders selling their units before three years will be taxed in line with slab rates.

If the fund house decides to shut shop, the money will be given back to the investors, in line with the net asset value (NAV) on the day. "Mutual funds are a pass-through vehicle and the regulations have taken adequate care to ensure the money invested in the scheme is well-protected," said Hemant Rustagi, chief executive, Wiseinvest Advisors. Since fund houses have at least two more years to fulfil the net worth criterion, these may be able to meet the Sebi norms, said experts. Notably, at least nine fund houses have met the criterion this year.

"It boils down to the comfort factor. If you are not familiar with the fund's style of managing money, it is best to avoid investing in its NFO and look at NFOs from other fund houses," said Rustagi. Earlier this year, Sebi gave AMCs three years to meet the minimum net worth requirement of Rs 50 crore. The previous was Rs 10 crore. As of September 2013, 19 fund houses had a net worth below Rs 50 crore.