In a room full of distributors, Motilal Oswal AMC’s (MOAMC) sales and distribution head Akhil Chaturvedi hard-sells the asset manager’s large & mid-cap scheme, a new fund offering (NFO).
Chaturvedi tries to convince the group of 100-odd distributors that the NFO can help create excitement among investors, especially those sitting on the sidelines, and get them to invest.
Distributors NJ India Invest, Bajaj Capital and Karvy are aiding the book building, he says, and Motilal Oswal’s promoters will invest a sizeable chunk of proprietary money in the fund. “We are doing this NFO with a lot of passion and conviction,” Chaturvedi says.
MOAMC is not alone. About two dozen fund houses have hit the market with 43 NFOs this year, garnering a little over Rs 7,500 crore. This was in a period the benchmark BSE Sensex rose 4.1 per cent. Investors should have found NFOs unpalatable, what with sustained market volatility, steep erosion in the value of mid- and small-cap names and the underperformance of existing funds.
But the collection figures indicate otherwise. Equity NFOs, in fact, have mopped up more than Rs 16,000 crore since 2018, 2.7 times the Rs 5,948 crore collected in the preceding three calendar years.
“NFOs are still the number one tool for gathering assets,” says Swarup Mohanty, chief executive, Mirae Asset AMC, whose two recent launches --- a midcap and a focused fund --- has collected in excess of Rs 1,500 crore. "When times are tough, pitching a new story can spur investor interest. The psychology of buying into a fund with a 10 rupee net asset value, although a marketing gimmick, can also be a draw," he adds.
The slew of launches has also been dictated by Sebi’s one-scheme-per-category diktat, in play from last year. Fund houses, especially the mid- and smaller ones, are using the launches to complete their product portfolio. Sebi has broadly classified all equity schemes under 10 categories. There is no restriction on number of index funds, exchange-traded funds, fund of funds, and sector/thematic funds that can be launched.
“Unlike earlier, most fund houses are launching NFOs to fill the gap in their product portfolio, not to garner revenues. While distributors benefit from slightly higher trail commission, incentives are lower as there is no upfront payout,” says Chaturvedi. For instance, a few years back, upfront commissions for selling close ended schemes could go as high as 5-6 per cent.
This year has seen the launch of three mid-cap, four small cap, eight large cap and nine multi-cap schemes. A dozen are index or exchange traded funds that include sectoral and thematic schemes. The number of equity schemes has risen to 562 from 519 two years ago.
“Index funds and ETFs are probably being launched to provide an alternative to investors that invest in large-cap funds, especially considering the latter’s underperformance in the recent past,” said Dhaval Kapadia, director - portfolio specialist, Morningstar Investment Advisers India.
According to Chaturvedi, new funds come with no baggage (in terms of returns) and are more agile since the corpus managed is smaller. Ironically, the lack of a track record is proving to be a selling point considering the underperformance of a large number of existing diversified equity schemes.
In general, financial advisors do not advocate investing in NFOs since they do not come with a track record. It is better to avoid NFOs unless it is a diversified offering and the fund manager has a good track record.
That NFOs are cheaper than existing funds is also a misconception among investors, said experts. Say an existing fund has a net asset value of Rs 100. This means one can buy 10 units of the fund for Rs 1,000. Investing in the NFO at Rs 10 would get you 100 units. If both schemes grow by 10 per cent over the next year, their investment value would rise to Rs 1,100. Buying a Rs 10 fund, in other words, will not help you realise higher gains.