Are New Fund Offers Made For You?
Dalal Street Investment Journal|August 02, 2021
The last one year has been quite hectic in terms of launch of new fund offers (NFOs). According to a report by Morningstar, in FY21 the industry launched 110 funds which have collectively raised Rs 48,988 crore. Such data would be quite tempting for investors to check out the NFO route of investing. But have you considered all the pros and cons? The article underlines the salient factors of NFOs

A lot has changed in the last couple of years for new fund offers (NFOs). Recently, one of India’s largest fund houses, ICICI Prudential, collected around Rs 10,000 crore in its NFO, ICICI Prudential Flexi-Cap Fund. To give you a perspective on this number, out of 400 odd equity dedicated mutual fund schemes, only 29 funds have asset under management (AUM) of greater than Rs 10,000 crore. Even within 30 flexi-cap funds that we have now, only seven of them have AUM greater than Rs 10,000 crore. This is probably the biggest collection by any single mutual fund scheme in India. Compare this with the start of the year 2019 when the fund houses had to extend the issue dates to collect a respectable amount in NFOs.

This highlights the euphoria around the NFOs. The last one year has been quite hectic in terms of launch of NFOs. According to a report by Morningstar, in FY21 the industry launched 110 funds which have collectively raised Rs 48,988 crore. Out of this, 45 funds were from the equity category that garnered around Rs 30,000 crore. Historically, we have seen that a lot of NFOs come when the equity market is doing well. The equity market from the lows of March 2020 has seen an impressive rise. This is also reflected in most of the equity dedicated funds that have delivered spectacular returns. Many categories of funds have generated returns in triple digits over the last 15 months. The last time we saw such a performance from equity-dedicated mutual funds was in 2017. Again in that year we saw 32 open-ended, equity-oriented NFOs getting launched.

The pattern that we have observed is that a good number of NFOs are launched after a good year of equity market performance. For example, 2010 was a good year for equity returns and BSE 500 index generated return of 15.32 per cent following which in the year 2011 we saw six NFOs getting launched. When in 2011 BSE 500 generated negative return of 27.78 per cent, there was only one NFO in 2012 while the BSE 500 gave return of 31.04 per cent. The year 2019 has been an exceptional year as we saw that despite 2018 not being a good year for the broader equity market, 36 NFOs were launched in 2019. One of the reasons for such a high number was due to the rejig done by market regulator SEBI in 2017 in terms of standardisation of the mutual fund schemes.

In October 2017, SEBI came up with its initiative of rationalisation and categorisation of mutual funds to bring forth uniformity in the way asset management companies (AMCs) function and standardise the character of fund schemes across categories. Some new categories were also introduced such as large-cap and mid-cap. This gave many AMCs an opportunity to launch schemes in the new categories. Besides, there were couple of fund houses that launched index funds tracking different stock indices.

One of the characteristics of recent NFOs is that many of them will be passively managed. An increasing number of index funds and ETFs are being launched now. In the last one year out of 104 NFOs launched, including debt and hybrid, almost one-third of them have been either index funds or exchange-traded funds that are mostly passively managed. What we have also observed is that after a good number of NFOs being launched, the equity market after has given a subdued return many a times as in the years 2015 and 2018. So, with a slew of NFOs coming forward, should you invest in them? Let’s find out in the following paragraphs.

Performance of NFOs

In last one year ending June 30, 2021 there were 34 equity dedicated funds launched in India. The sub-category that got the most launches was ESG funds, where six funds were launched. This was followed by the ‘other’ category that included a couple of quant funds.

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