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NFOs Chant Market Mantra

The top new fund offers (NFOs) of all time have had the good fortune of being birthed under a rising market star

Sentiment has a role to play in markets, perhaps to quite a large extent. This may also apply to the mutual fund industry, especially when it comes to new fund offers (NFOs).

Checking out the historical records has exposed an interesting bit of information: The NFOs that became the investors’ darlings and thereby collected the highest amounts, invariably came at a time when the markets were ruling at a high. The contrary truism is that NFOs launched when the markets have crashed didn’t really do well.

An example of sentiment-obsessed markets was the huge uptick when election results revealed that one party has got a big enough majority and that the era of coalitions was over, for a while at least. The stock market indices climbed by 17.34 per cent on 18th May, 2009 on the belief that this new government would put its money where its mouth was and unveil big ticket reforms.

That did not happen when the Budget was presented causing markets to fall and as a result we got the most recent example of opinion driving markets -- they tanked more than 1,000 points in three days.

MARKET MANTRA

At the turn of the millennium, in the period between July 2, 1999 to July 2000, thanks to a rather meek stock market trend, there were negligible fund mobilizations. The industry suffered, after all the launch of NFOs costs a lot of money. NFOs came and went, but none of them managed to convince investors enough to give the fund houses a standout collection. Average was the theme that played out over the period.

Especially between the period between November, 2000-2002, as the Sensex dropped lower (the dotcom bust) the net result was the flow of NFOs virtually dried up or their mobilizations were not even worth a mention.

But mobilization of great amounts of money started gaining momentum once the markets started picking up from March 2004, and with each high in the market, the NFO collections vied with each others in a garish display of one-upmanship – the industry was on a high.

It was during this rise in markets, in March 2006, that one of the NFO mobilisation figures reached an industry pinnacle, touching Rs 5,800 crore (Reliance Equity).

Meanwhile, consistent new equity fund launches and their mobilizations by fund houses continued apace after 2005 when markets were moving towards their all-time high near December 2007.

Then came the fall. The tentacles of the global financial crisis gradually swept over the Indian financial world, causing great destruction on the stock markets especially. And the moment markets started slowing down, leading funds houses saw the trend reflected in their NFO collections. The trend was broken finally when Reliance Infrastructure fund came along in June and raced into the list of top 10 NFOs of all-time – the markets had gained some 77.61 per cent between March 9 to June 30.

It was during the period (between 2006 to early 2008) that nine of the top ten equity NFO mobilizations were recorded. A look at the collections and comparing them to the market conditions at that particular time, helps reveal the closely linked mechanism which is at work (Check Tables).

The top 10 equity fund mobilizations collected a total of Rs 1,93,00 crore through open-end funds, while the sum was Rs 1,28,000 crore for the closed-end funds. The rally in the market was driving NFOs to unforeseen heights.

CONFIDENCE QUOTIENT

While attempting to ‘time’ the NFO to coincide with market highs is more than difficult, since it is such a cumbersome administrative process, yet there are some fund houses that have been consistently ‘lucky’. Among them is Reliance Mutual Fund (MF).

Not surprisingly, in the top 10 NFOs list, five belonged to Reliance (open- and closed-end equity), namely Reliance Equity, Reliance Natural Resources Retail, Reliance Equity Advantage Retail, Reliance Long Term Equity and Reliance Infrastructure. Figures point out that in terms of mobilization, Reliance Equity (launch date of NFO-- December 11, 2006)remained at the top with Rs 5,790 crore, while Reliance Natural Resources Retail remained second with Rs 5,660 crore (launch date of NFO January 30, 2008).

Altogether, three Reliance equity NFOs remained amongst the top five funds in this section. Even during the present financial crisis, Reliance Infrastructure mobilized Rs 2,350 crore (June 2009).

Aside from the market-NFO-linkage, the reason why investors are drawn to Reliance MF is the connotation acquired by the brand ever since the time the late Dhirubhai Ambani literally pulled the rabbit out of his hat for stock market investors. Reliance has carved a niche all of its own. Furthermore, while the latter has a lot of recognisable schemes, built over a period of time, leading to recognition in the market place, they are also known to pay fund advisors generously to sell their products.

PERFORMANCE

Another aspect which can be taken into account here is that while these NFOs have been prodigious money-gathering entities, they have not always been successful in meeting investors' expectations. All the top 10 NFOs have seen a negative asset growth.

Although the falling markets have a huge role to play in this, investors have also punished these schemes by fleeing them as suggested by the difference in the change in their assets and the returns that they have generated since their launch.
A look at the total returns for a period of one year of these funds reveals that almost all the funds have given a positive return except the two open-end funds of Tata Indo Global Infra which dipped 7.96 per cent and Reliance Natural Resources which gave returns of -4.63 per cent (one-year returns). On the other hand, the assets of both Reliance Equity and SBI Bluechip (Open-end) have fallen by more than 60 per cent.

WAKE-UP CALL

However, with the situation transforming for the industry in the wake of changes effected by the authorities, what lies in store in the future is unclear. Questions are already being raised about the future of new fund launches with market regulator the Securities and Exchange Board of India (SEBI) banning entry loads. Since its announcement, distributors have started crying foul as they would not be able toget their commission which drove them to encourage investors to invest in NFOs. They have no reason to sell MF products any longer.

With one of the most important fulcrums of the industry missing, changes, whatever they be, may leave fund houses in disarray. And, as far as the market-NFO linkage is concerned, watch this space.

Top 10 Equity NFO Mobilization
Fund Launch Type Mobilization AAUM # Asset Growth (%) Returns*
Reliance Equity Mar-06 Open-end 5,790 2,285 -60.54 8.19
Reliance Natural Resources Jan-08 Open-end 5,660 4,554 -19.54 -10.00
UTI Infrastructure Adv - Ser I Dec-07 Closed-end 3,500 2,480 -29.15 -14.60
SBI Bluechip Jan-06 Open-end 2,850 1,085 -61.92 4.40
Reliance Equity Advantage Jul-07 Open-end 2,645 1,834 -30.68 -1.31
SBI Infrastructure Fund Ser 1 Jun-07 Closed-end 2,537 1,948 -23.21 -5.62
Sundaram Energy Opp Dec-07 Closed-end 2,432 1,809 -25.63 -19.58
Reliance Infrastructure Jun-09 Open-end 2,350 - - -
Tata Indo Global Infrastructure Oct-07 Closed-end 2,217 1,381 -37.70 -20.52
Reliance Long Term Equity Dec-06 Closed-end 2,092 1,935 -7.48 2.52
* Since Launch Returns as on June 30, 2009
# Average Assets Under Management for June 2009