Addressed root cause behind NFO frenzy, open to more steps: Sebi's Buch

Sebi chief calls upon Amfi for guidance on the issue

The Securities and Exchange Board of India (Sebi) has taken proactive steps to address the "root cause" behind the surge in mutual fund (MF) scheme launches, its Chairperson Madhabi Puri Buch said on Friday.

 

Speaking at an event hosted by the Association of Mutual Funds in India (Amfi), Buch emphasised that the regulator is open to implementing further measures to curb the proliferation of thematic funds.

 

"We understood the new fund offering (NFO) problem, so we addressed it. We would be very keen to understand (if there are further issues). Amfi has always been collaborative, and I would say that it should come and guide us on this," said the Sebi chief.

 

MFs have been on a new scheme launch spree for over a year now, with NFOs topping 200 for the first time in a calendar year (CY) in 2024. This includes more than 150 NFOs in the equity space, both active and index funds, according to data from Morningstar India. In 2023, the equity NFO tally stood at 89.

 

The majority of these launches in the active equity space were in the sectoral and thematic categories, which are considered the riskiest among all equity MF categories. In the case of passive funds, most were thematic and factor-based.

 

Sebi has introduced a new rule aimed at ensuring that MFs do not launch ill-timed products and preventing unnecessary portfolio churn by distributors. 

 

From April 2025, fund managers will be required to deploy the corpus collected during the NFO period within 30 days. Currently, there is no prescribed time frame for deployment.

 

Distributors will no longer earn higher commissions for switching existing investments to NFOs.

 

"To address the issue of possible misselling in NFOs, for switch transactions, the distributor shall be entitled to the lower of the two commissions offered under the two schemes of the switch transaction," Sebi had stated in a statement issued after its board meeting in December 2024.

 

MFs offer a switch option where investors can directly transfer funds from one scheme to another as opposed to redeeming the investments, and then putting that into the new scheme.

 

Experts say Sebi's objective is to ensure that fund houses launch schemes considering market conditions and only collect the amount they can deploy. This move aims to promote responsible fund management and protect investor interests.

 

Buch also addressed concerns about midcap and smallcap stocks, stating that there is no need for a statement on their valuations at present. The regulator had flagged "froth" in the broader market in early 2024.