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A New World for MFs and Investors

NFO mania-generating times are gone, what is coming now may be more productive for investors

Whatever other changes the future brings for the investment community in India, I’m sure that the way mutual funds are bought and sold is in for some fundamental changes. As things stand, the mutual fund industry is starting to stir to life after many months from an utterly moribund state. Last week, a new fund offer (NFO) from ICICI Prudential Mutual Fund actually fetched Rs 800 crore of fresh investments. While this is a paltry sum indeed by the standards of 2007 when NFOs of many thousands of crores had become the norm, it is a huge step forward in the current situation. I know for a fact that these 800 crore rupees have galvanised every fund company’s marketing machinery, and plans to launch a clutch of new funds are being feverishly brought to readiness.

Except that things are no longer the same. Up till now, NFOs have been the mainstay of marketing pushes made by the mutual fund industry. There are a variety of reasons that are responsible for this, but the biggest has been that the money needed for intense marketing and advertising new funds used to come from the fund itself. Fund companies could (and most did) deduct up to six per cent from investors’ funds to pay for the NFO’s marketing costs. This gave them considerable leeway to spend on marketing as well as pay massive commissions to agents for selling new funds. Since the distributors’ push always plays a vital role in selling any financial product, the high commissions meant that while the steady stream of NFOs continued, no one was pushing existing funds. The only sensible way of choosing funds is based on their track record. However, market forces drove Indian investors overwhelmingly towards gimmicky new funds whose themes had often been dreamed up just to facilitate the creation of a new fund.

However, the market regulator has eventually put an end to the combination of circumstances that were driving this NFO mania. Since 2006, funds could no longer deduct launch expenses in open-end funds and in 2008, this was effectively banned in closed-end funds as well. By that time, fund investments had dried up due to the stock markets crash and later the global financial panic. Now, as the first green shoots of recovery have started sprouting in the market for investment products, I believe that mutual fund companies as well as investors are stepping into a whole new world.

For the first time, a fund company has no more money to spend on a new fund than it has on an older fund that is already in operation. And given that a launch is always going to cost more money than an existing product, this should give a real advantage to mutual funds that already have a track record of outperforming their peers. In theory, this advantage should always have been there, but as we’ve seen above, it wasn’t. This could actually bring about a concordance in the interests of fund companies and investors that has been missing till now.

An investment products market in which getting good returns is actually more helpful in selling funds compared to inventing new funds could be the best thing to happen. Inevitably, it will make good investment management to the forefront as the one factor that will spell business success for a fund company. Perhaps it sounds like I’m indulging myself in wishful thinking, but even a partial shift towards such a situation would be a great thing to happen.

Also see:
ICICI Pru NFO Garners Rs 800 cr