Equity NFOs hit eight-year low

Regulator’s tough stance and poor capital markets discourage new offers; analysts expect trend to continue next year.

The poor state of the stock market and the capital market regulator's tough stance against launch of a new scheme without proper justification have hit the launch of equity new fund offers (NFOs).

These have hit an eight-year-low in this calendar year. Only 10 new schemes have been launched till date this year, garnering merely Rs 612 crore against Rs 4,659 crore last year (see table).

Dhirendra Kumar, chief executive officer of fund tracker Value Research, says, “Sebi (Securities and Exchange Board of India) demands justification of every single new offer and it is difficult for fund managers to provide a distinct logic.”
 

A RICH LEGACY
Dwindling number of equity NFOs

YearNumber of
new fund offersFunds raised
(Rs crore) 2004294,384 20054325,225 20063936,741 20074829,284 20084121,071 2009174,411 2010234,659 2011*10612 * Till November, 2011
Source : Association of Mutual Funds in India 

The chief marketing officer of a public sector bank-sponsored fund house agrees. “Since C B Bhave took over (as Sebi chief, from February 2008, for three years), new offers have been continuously discouraged. Every time a fund house comes up with a fund offer, the regulator asks for the entire product kitty, to ensure there is no overlapping of schemes."

According to industry experts, in a poor market it is not possible to raise money by launching NFOs. This year, domestic benchmark indices have seen erosion of a fifth of their values. All categories of equity funds, except those in fast moving consumer goods, have lost investors' wealth. In some cases, the losses have been 30 per cent over the year.

Earlier, says Kumar, it was an NFO game, but gone are the days when one would expect higher collections. For instance, the latest equity NFO from Tata Mutual Fund could raise only Rs 10 crore. More, experts say it is very difficult nowadays to recover the costs incurred in coming up with new schemes.

Dhruva Chatterji, senior analyst at Morningstar India, says, "Abolition of entry load has killed equity NFOs. Plus, the equity market condition has not been conducive. Whatever new fund schemes came were from a handful of international funds. The cost structure is another issue preventing fund managers from launching new schemes. They are not able to recover marketing and distribution expenses."

Further, fund managers say the reduction of the time period given to launches, of 15 days, is another reason for the dwindling number of NFOs. "Earlier, we could amortise six per cent, which is not happening today," explains the chief marketing officer cited earlier.

As of November 30, the assets under management of equity schemes had shrunk to Rs 1,48,353 crore against a little over Rs 2,00,000 crore a few months before. Fund managers say that there is likelihood that 2012 will see a further reduction in equity launches.

"Only new players which want to build up their product kitty could come up with new schemes. I assume existing players would prefer to continue with merging schemes to escape any duplication and overlapping of investment mandates," adds the CEO of a medium-sized fund house.