A change is in the air

Written by Dhirendra Kumar | Updated: May 31 2009, 05:58am hrs
After almost 15 months (yes, its been that long) of downfall after downfall, the Indian stock markets have finally changed course and is in a revival mode. There hasnt really been a change in the Central government, but the UPAs overwhelming victory suggests that there has been a change in the Indian voters mindsets. And now suddenly, the entire economic outlook seems to have changed this time for the better.

What this whole scenario has done is that it has brought about a change in mutual fund investing as well. Last week, an NFO from ICICI Prudential Mutual Fund fetched fresh investments worth Rs 800 crore. I know this amount is nothing compared to the exorbitance seen in the 2007 NFOs, but it is definitely huge in the present scenario.

This NFOs earning shows that investors are feeling good about the markets again. There is money out there and people are ready to put it back into equity funds again. What it also shows is that the mutual fund industry is waking up and with this NFOs success, investors can once again expect a flurry of new funds in the coming times.

However, this time around, things wont really be the same as before. Yes, NFOs will be launched, but probably not as many as earlier. One of the main reasons for this is that fund companies will no longer be able to rely on new investments to pay their advertising and marketing dues. Earlier, fund companies could and they did deduct up to six per cent from investors funds to pay for the NFOs marketing. This enabled them to spend heavily on marketing

Ideally, a fund should be bought on the basis of its past performance. Even though the past is no indication of the future, an existing fund has at least something to show for itself. But with fund companies earning a lot more from new funds, NFOs were marketed aggressively and at times, new gimmicks or themes were made up just to launch a new fund. Now, however, that is bound to change. Fund companies will now have no more money to spend on launches than on existing funds. Moreover, launches are way more expensive than promoting an existing fund. Hence, this might actually turn out in favour of investors. Fund companies might promote well performing existing funds and investors will end up buying them, which is anyway what they should be doing in the first place.

In an ideal investment marketplace, a fund, which has been through ups and downs, should get preference over a novice fund. But as we have seen, that has not been the case. In this ideal marketplace, good investment management should be one of the primary criterion for a fund to be sold and hence, its companys success. Will that happen now I might be asking for too much, but the changes are at least taking us in that direction.

The author is CEO, Value Research