Bid to push back redemption trend

Updated: Mar 29 2006, 05:30am hrs
The Securities and Exchange Board of India (Sebi) is soon expected to come out with guidelines to make issue expenses of new fund offerings (NFO) a part of the entry load for all open-ended funds and remove the amortisation of issue expenses over a period of time. This move is being viewed as an attempt to check redemption pressures, reduce brokerages and encourage long-term investments in the equity market.

The Association of Mutual Funds in India (Amfi) has expressed its reservations on amortisation of issue expenses and has urged the regulator to make issue expenses a part of the entry load for all the open- ended funds. And, if fund houses refuses to do so, then asset management companies (AMCs) should absorb all the issue expenses of an NFO. AP Kurien, chairman, Amfi, feels the proposed new norms would be based on fair principle and would help both the industry and retail investors.

At present, fund houses can charge 6% of its collection during the NFO towards issue expenses. If a fund collects Rs 100 crore, then Rs 6 crore can be charged towards issue expense. The fund houses spend this money towards marketing and advertising an NFO. This sum can be amortised over a period of five years. However, the industry feels that by making issue expenses a part of the entry load, short-term investors would be discouraged from entering an NFO. It would also check redemption pressures due to which fund houses have turned net sellers in equity in the recent past. Mutual funds were net sellers at Rs 1,374 crore in December 2005, Rs 1,172 crore in January and Rs 246 crore in February this year.

Added to this, redemption pressures and re-purchases of new schemes also keep fund managers busy in clearing investor settlements. In turn, fund managers get time for innovative ideas to enhance returns for investors.

The new norms are expected to make NFOs a bit costly. The retail investor would be discouraged in having a long-term view. The present system of amortisation of the issue has a direct bearing on long-term investors, as the net asset value (NAV) in a scheme dips in the long run due to amortisation over a period of time. Long-term investors have to bear the brunt of profits coming down.

The new norms would also check the exodus of retail investors from existing schemes to enter the NFOs. Brokers encourage them to do so, as they get good brokerges.

Sebi, in its board meeting on March 20, has already discussed all these issues and is mulling over issuing a circular in this regard. The Centre has already taken certain steps in the Union Budget for 2006-07 to encourage long-term assets in the equity market. It has brought close-ended funds in the equity schemes at par with the open-ended ones by waiving dividend distribution tax.

The attempt of the government, Sebi and the industry association to introduce stability in the MF industry is expected to attract more retail investors. Equity-dedicated schemes offered by the MF industry have been giving, on an average, a return of 20% to 25% per annum, which is much higher than any financial instrument in the market at present.All threegovernment, Sebi and MF industryfeel that stability of the industry was necessary for attracting investors.

MFs have the potential and can perform a balancing act, in case foreign institutional investors withdraw their investments. FIIs have been held responsible for the crash in the market in the past. The market lost more than 50 points at the end of trading on Black Friday (May 17, 2004) due to heavy FII withdrawals. However, in FY 2005-06 till date, FIIs have been net investors in equities at Rs 46,651 crore, whereas domestic MFs have pumped in Rs 13,081 crore during the same period.