The "close-ended" way to tap investor's money through new fund offers (NFOs) is closed now.
With the Securities and Exchange Board of India (Sebi) scrapping the initial issue expenses and amortisation for close-ended funds, they are no longer favoured by the fund houses.
Mutual fund houses used to charge 6 per cent of the total investment over the fund's period for meeting distributor needs and sales and marketing expenses.
Last year, there was a flood of close-ended funds with similar sounding names and investment strategies.
Now, these expenses have to be met through entry load only (2.25 per cent generally), according to the market regulator.
Anthony Heredia, executive director, Morgan Stanley Mutual Fund, says, "The removal of initial issue expenses will have a bearing on economics of a fund launch. It may impact the plans of some fund houses."
More From This Section
Although market conditions have forced fund houses to go slow on new launches, most NFOs this year, including the ones lined up, are open-ended in nature.
Out of 32 equity funds launched this year, only five are close-ended funds. These funds were launched prior to the Sebi ruling that came in at the end of January. Not just fund houses, distributors also made money from pushing such schemes as they asked investors to pull out money from existing schemes and put it in NFOs.
With fund houses bearing expenses from their own pockets, there have been fewer advertisements for new products this year. Earlier, there used to be swanky launch parties and an aggressive ad-campaign from investor's money to ensure targeted collections.
Heredia says, "Massive advertising will not happen now. The ad-spend also sometimes depends on type of the fund, expectation of the fund house and market environment."
The general industry trend for ad-spends used to be from Rs 1-2 crore of the total corpus of the fund to as high as Rs 20 crore sometimes.
Says Dhirendra Kumar, CEO, Valueresearch Online, "Now, there is a parity in pricing. Earlier, distributors were incentivised to promote such products. In some cases, they were paid as high as 5 per cent of the total corpus. But now that practice is certainly out of question. Distributors will have to figure out another business model."
Lower expenses for funds would mean better returns for investors, many of whom do not even know how the scheme works.
For an investment of Rs 10 lakh, the AMC used to charge Rs 60,000 as initial issue expenses. This would erode the returns of fund over three years or five years depending on the tenure of the fund.