Equity NFOs pick up as market rallies

There has been a surge in new fund offer (NFO) schemes in the equity mutual fund segment over recent months, amid a strong rally in share prices. The earlier belief was that such offers were loss-making propositions and would die with the current cap on commissions.

In all of 2016-17 (the financial year ended on March 31), the MF sector saw 29 new equity schemes, both closed-end and open-ended. As many as 25 of these hit the market during the September-March period, garnering assets worth ~4,220 crore.

“This is certainly not a small size. It's surprising but is true and I feel if the market remains strong, there could be an increasing trend of new offers,” says Swarup Mohanty, chief executive at Mirae Asset MF.

He says NFOs are currently the riskiest of products but there are still a large section of investors who get enticed by the ~10 unit value.

The cap on upfront commissions and a focus on the trail-based model, among other regulatory pressures, had impacted new launches. However, it appears that when inflows in equity continue to be strong, the availability of a performance record takes a back seat.

Fund houses which have stepped up their launches in recent times include Sundaram MF, Axis MF, UTI MF and ICICI Prudential MF. Others which launched new schems in recent months are Birla Sun Life MF, HDFC MF, IDBI MF, BNP Paribas MF and Mahindra MF.

Interestingly, the focus is largely on closed-end schemes. Of the 25 recent launches, 19 were of this type, through tax saving schemes and pure equity products.

Kaustubh Belapurkar, director (fund research) at Morningstar India, says: “We expected NFOs to slow down but it turned the other way round. However, it is not alarming, as the assets garnered through new launches are only a fraction of what is coming in the existing funds, a good sign.”

Total inflow in equity schemes (including equitylinked savings ones) during FY17 was a little over ~70,000 crore. New equity launches could gather only ~4,450 crore. Sector executives feel fund houses which have their product basket full might not need to come up with any other scheme. Those without schemes in different categories will continue to launch these and there is no harm in doing so. For instance, the newest entrant, Mahindra MF, brought a Dhan Sanchay Yojana; BNP Paribas recently launched a balanced fund.