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No Logic in Buying Into NFOs

The flurry of NFOs launched by MF industry should not get investors excited

The mutual fund (MF) industry is currently passing through what could well be the last hurrah of new equity fund offers (NFOs). By recent standards, investors in funds are seeing a deluge of new equity funds. Reliance MF is just through with its hugely successful Infrastructure fund. DSP Blackrock has a World Energy Fund on offer in both an institutional and a retail avatar.

Franklin Templeton, which thankfully is not as trigger-happy on NFOs as some others, finally hopped on to the infrastructure bandwagon with its Build India Fund. The smaller players are at it to. Sahara is launching a diversified equity fund called Super 20. Quantum is launching an equity fund of funds that will invest in other fund companies' products.

With this sudden flurry of activity after a long barren period, investors may be forgiven for thinking that the current time is a particularly opportune one for investing in funds. Or that these funds fill some critical gap in the range of investments available to the public. The reality is nothing of the sort. The current flurry of activity is a result of the internal dynamics of the fund industry and the regulatory environment. Investors have no reason to be excited about investing in new funds.

The last months or so has seen the coming together of two factors. One, markets have been doing consistently well (at least till the budget came out). And two, the Securities and Exchange Board of India (SEBI) announced that entry load was being abolished for all mutual funds. This is bound to completely change the selling of funds. Up till now, fund distributors were getting an up front commission which made the business of selling NFOs extremely attractive.

This ends on August 1, 2009. From that day onwards, the entire business of selling funds is likely to be in flux for a while. Many distributors are up in arms over the new rules and there have been stories of distributors' associations threatening to stop selling funds. Other distributors, whom I have spoken to, have said that fund companies have privately assured them that they will get some sort of an upfront commission from the fund company. Moreover, it isn't as if there won't be any up front fee. What SEBI has said that the investor will pay the distributor directly according to what they mutually decide the as the worth of his services. I'm sure most of you will be happy to make a fair payment for services received.

Anyhow, no matter how all this works out, it is clear that come August 1, funds and distributors taken together will be sharing a much smaller pie for selling funds. And that is why you see this flurry of NFOs before the entry load train leaves the station for the last time. As I've always said, there's almost never any logic in buying a fund when it's new and unproven.

About the only new idea in the present clutch of NFOs is the DSP Blackrock World Energy Fund, which will invest abroad in stocks of energy companies. Even here, it would make sense to invest small amounts gradually rather than a large sum during the NFO. As for the rest, there are plenty of diversified equity as well as infrastructure funds with long and proven track records available from a large variety of fund companies and there's no earthly reason for going for a new fund.