New fund offerings (NFOs), which were expected to see a sharp slowdown after the scrapping of upfront commission, are showing signs of recovery as 11 equity NFOs launched between April 2019 and July 2019 attracted more than Rs 4,000 crore of investor flows. Market experts say the uptick in the markets can give a boost to these flows.
An analysis of data collated from Association of Mutual Funds in India showed that the average NFO collection between April 2019 and July 2019 was Rs 377 crore, which was more than double the average collection seen in previous four months. Compared to the corresponding period last financial year, the average collection is 14 per cent higher.
According to industry experts, savvy investors are taking exposure to the recently floated NFOs. "We are yet to see a rush of flows into NFOs, but sophisticated investors are making investments as they understand that the market corrections offer good buying opportunities," said Swarup Mohanty, chief executive officer of Mirae AMC.
In July, five NFOs garnered Rs 1,927 crore of flows. These included Mirae Asset Mid Cap Fund, Kotak Focused Equity Fund, Birla Sun Life Pharma & Healthcare Fund and Quantum India ESG Equity Fund.
The collections are still much less than the peaks seen between July and October last year when the average collection was as high as Rs 569 crore.
"A sharp upmove in the markets can lead to stronger flows to NFOs as investors’ sentiment improves," Mohanty added.
On Monday, the BSE benchmark Sensex ended more than 2 per cent high after the government last Friday decided to roll back tax surcharge on foreign institutional investors, besides announcing a slew of measures to revive the domestic economy.
Advisors say that some investors have been taking exposure to new fund as they feel a fresh portfolio constructed at lower market levels will have limited downside. "After an NFO, a fund manager typically takes one to three months to fully deploy the proceeds. Investors feel that a fund manager can deploy these funds effectively -- especially to the mid- and small-cap side -- as these stocks have been trading at sharp discounts to their previous highs," said Amol Joshi, founder of financial advisory firm Plan Rupee Investment Services.
Industry observers say that even as upfront commissions are scrapped, NFOs offer flexibility to give higher distributor commissions under the new regulatory regime.
The Securities and Exchange Board of India (Sebi) in September last year linked scheme size and total expense ratio (TER), which includes commission payouts and fund management fee. The new regulations were aimed at incentivising smaller schemes with higher TER, which, experts say, would also benefit NFOs.
In the same board meeting, Sebi announced its decision to scrap upfront commissions. After upfront commissions were formally removed in October, equity NFO collections dropped to Rs 1,172 crore, 44 per cent less than the previous month.
In the following month, the collections fell to a measly Rs 409 crore — 65 per cent less than the previous month.
This aggravated fears that removal of upfront commissions would significantly erode NFO collections. Industry sources suggest that in the earlier regulatory framework, steep upfront commissions were used by certain fund houses to raise higher funds in their NFOs.