It’s raining NFOs! Major parts of India might be facing a dry spell as far as the monsoon is concerned, but when it comes to New Fund Offers, there seems to be no paucity.
The escalating markets in 2007 led to a deluge of new funds being launched all through the year, and the story seems to be repeating itself right now as well. A string of new funds have come out in recent times.
Reliance has recently completed the NFO period of its very successful Infrastructure Fund. DSP Blackrock has a World Energy Fund on offer. Franklin Templeton – which has traditionally not been as trigger-happy on NFOs as some of its peers – has also hopped onto the infrastructure bandwagon with its Build India Fund. Smaller players like Sahara and Quantum have NFOs open as well – the former with an equity diversified fund called Super 20 and the latter with an equity fund that will invest in other fund companies’ funds.
All of these new launches might lead investors to believe that this is the most opportune time to invest in NFOs, but that’s really not the case.
When one probes deeper into the recent happenings in the equity markets and the mutual fund industry, ones comes to the realisation that there is a clandestine reason behind the flurry of NFOs.
Firstly, the pre-budget performance of the stock markets has been impressive. And secondly, as per Sebi’s new ruling, from
August 1, 2009, the entry load on all mutual funds will be
abolished.
This ruling is set to bring a major turnaround in the fund selling business. Fund distributors, who get a commission for selling a fund, are now threatening to altogether stop selling funds. I have spoken to quite a few of them, and they say that fund companies have privately assured them of an upfront commission for selling their funds. I am also sure that distributors will also work out an amount with investors, which will be a reasonable fee for their services.
How this works out is a completely different story, but what this ruling has led to is the recent cloudburst of new funds. Quite apparently, fund companies want to cash in on the entry load for one last time before this mode of earning becomes extinct. And this is the reason for the NFOs, not any particularly ripe investment time.
In fact, I’ll just say what we, at Value Research, have always said: there is never an opportune time to invest in new funds. A new fund should be given a thought only if it is of a completely new genre, something that hasn’t been on offer till then and has some obvious potential.
Of the current lot, the DSP Blackrock World Energy Fund fits this bill, as it will invest in stocks of foreign energy companies. But still, since it is a new fund, investors should put only small amounts into it. Apart from that, new funds should be given a miss. There are enough proven infrastructure and diversified funds out there. They have a proven track record, something that a new fund would obviously never have.
Like I said earlier, the current flurry of NFOs is because of the internal dynamics of the industry and the regulatory environment. Investors have no reason to be excited by them.
The author is CEO Value Research