Rush for NFOs amid buoyancy in markets to offset net redemptions

Over 12 offer documents filed in a single day last week

Equity mutual fund (MF) schemes, despite buoyancy in the markets, have seen sustained net redemption since July.

To stem outflows and boost asset mobilisation, the Rs 30-trillion asset management industry is making a beeline for new schemes.

On Friday, documents for over 12 new fund offer (NFO) were filed with the Securities and Exchange Board of India (Sebi), taking the year-to-date count to 30.

Experts say even as investor sentiment remains bullish, most existing schemes are seeing outflows every month. And hence, many players say NFOs could be a good way to draw retail attention.

“Launching new funds is a way to attract money into equity mutual funds,” said the chief executive officer of a leading fund house.

In January, equity-oriented MF schemes logged net outflows of Rs 9,253 crore. Since July, investors have pulled out over Rs 42,200 crore from equity schemes, even as the Sensex rallied nearly 50 per cent.

The data from the Association of Mutual Funds in India (Amfi) shows between April and January, MFs mopped up over Rs 34,397 crore through NFOs, at an average of Rs 614 crore per issue. 

Last month, the NFO of the ICICI Prudential Business Cycle Fund had collected Rs 4,185 crore.

The latest crop of filings is a mix of passive as well as active funds.

Swarup Mohanty, chief executive officer at Mirae Asset Management Company (AMC), said: “The two NFOs we have filed are from the passive space. Both are differentiated products in the markets. We feel that a combination of both active as well as passive funds will lead to a superior portfolio for investors.”

The fund house is seeking Sebi approval to launch the Mirae Asset Global Nextgen Tech Fund of Fund and Mirae Asset US FANG Plus ETF.

NFOs not only help asset managers garner new assets but also, given an opportunity, allow the distributor to pocket higher commissions.

“For the first few months of the last financial year, there was no activity in the NFO space due to the lockdown. But now with new funds coming to the markets, it’s an advantage for fund houses as well as distributors,” said a senior executive in the industry.

Typically, fund houses pay around 80 basis points (100 basis points equal to 1 per cent) as trail commission to distributors. But for NFOs, the commissions are in the range 1.80-2 per cent.

In the past two years, the MF industry has shown a tilt towards more passive funds, particularly those offering global exposure.

This comes at a time when actively managed schemes have struggled to beat their benchmark returns.

In the calendar year 2020, nearly 60 per cent -- 17 of 29 schemes -- of equity large-cap schemes had underperformed the Nifty 100 index, which rose 11.8 per cent.

Suresh Sadagopan, Founder of Ladder7 Financial Advisories, said, “Many fund houses have filed drafts for passive funds, which are gaining traction among domestic investors. Fund houses that have certain passive funds are opting for ETFs and index funds.”

According to Sebi rules, a fund house can launch only one open-ended scheme in various sub-categories in the equity and debt segments.