Focus on investors

On Monday, the Securities and Exchange Board of India (Sebi) took a number of steps to benefit mutual fund investors. These included reduction in the New Fund Offer (NFO) period and use of Application Supported by Blocked Amount (ASBA). We take a detailed look at these:

Reduction in NFO period: NFOs launched by mutual funds for open-ended and closed-ended schemes were earlier allowed to be open for 30 days and 45 days, respectively. This has been reduced to 15 days from July 1, except for equity-linked saving schemes.

Industry experts say this will hit them as MF schemes are “push-driven”, that is, they are marketed and sold. Now, fund houses might have to start marketing NFOs before launch, said fund managers.

The Sebi circular also said, “Mutual funds/asset management companies (AMCs) shall use the NFO proceeds only on or after the closure of the NFO period. The mutual fund shall allot units/refund money and dispatch statements of accounts within five business days from the closure of the NFO.”

Said Rajiv Anand, chief executive officer, Axis Mutual Fund, “These changes may impact collections in the short term. But, the challenge will be to put together account statements in five days.”

Asba as an additional way to pay: Asba was developed by Sebi for initial public offerings. Under ASBA, the applicant’s money is debited only on allotment of shares. This has been extended to mutual funds too, starting July 1.

While some experts say this will help investors earn more interest, fund houses disagree. A Balasubramanian, chief executive officer, Birla Sun Life Mutual Fund, said: “It will not make much of a difference. The amount is debited (even now) only on the last day of the NFO period.”

Anand said if the money was getting debited during the NFO period, it was being deployed by the fund to earn returns, which would not happen now.

“If it is used by the fund manager during the course of the NFO, it may earn more returns than what a bank will pay,” said a top executive of an AMC.

Dividends from realised gains: Mutual funds are supposed to pay dividends from actual or realised profits. However, some fund houses use the unit premium reserve (UPR), an unrealised profit, to lure investors.

For instance, if the net asset value of a scheme is Rs 15, one-third (Rs 5) is put away in UPR and the remaining Rs 10 is the unit capital or face value. However, if an investor enters at Rs 15, the fund house pays from UPR.

Sebi has come down hard on this practice. A fund house will now have to book profit to pay the investor. Experts said this would bring down the dividend payout significantly. Rajan Mehta, executive director, Benchmark Asset Management, said: “This will reduce dividend payouts by mutual funds.”

Earlier, fund houses were paying 25-30 per cent dividend, which would come down to 5-10 per cent, said an AMC executive.

No revenue-sharing between FoF and offshore funds: Fund of funds (FoF), which are primarily feeder funds that invest in schemes in other countries, have also come under Sebi’s scanner. The market watchdog has said that fund houses cannot enter into revenue-sharing arrangements with underlying funds (that is, funds in whose schemes the investment is being made).

This may not have much impact because FoFs have not taken off. But, it will benefit investors. “Till now, there was no mandate as to where the FoF would use the revenue earned. Hence, it was being used for marketing and paying commissions to agents. Now, it will be passed on to the scheme and, hence, to investors,” said Balasubramanian.