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A Ban Boon For Funds

The abolishment of entry loads will not kill the industry, but its still eyeing NFOs as their main fund gathering activity

If new fund offers are anything to go by, then fears of the mutual fund industry’s impending demise could turn out be exaggerated. According to information available with the market regulator the Securities and Exchange Board of India (SEBI), no fewer than 12 fresh new equity funds have been pushed into the pipeline ever since the announcement of the abolishment of entry loads.

Clearly, despite the fact that fund companies and distributors will now make less money than earlier, there’s unlikely to be any slowdown in the activity level in the industry. Moreover, everyone who is taking an investor-centric view can see clearly that the lower cost and increased transparency in mutual funds can only be good for investors and anything that is good for investors will prove to be good for everyone.

Be that as it may, it is apparent that launching new funds will continue to be the main way of attracting investors to invest in equity funds. This is a disappointment. As I’ve always said, there’s simply no logic for investors to invest in new funds. New funds do not have a track record. No matter what the marketing hype of a new fund says, there is almost never anything genuinely new under the sun. There are always older funds of the same type that are available. It’s much better to examine older funds of the same type and simply pick one which has the best track-record and invest in that instead of choosing a new fund. However, this doesn’t happen. Investment analysts like me have been singing this tune for a long time but only a small fraction of investors manage to resist the lure of new funds.

Till about a couple of years there was a clear commercial reason for fund companies to pitch new funds only. Under the rules in effect then, fund companies could deduct a fairly hefty (up to 6 per cent) chunk of investors’ money in new funds to pay for new issue expenses like advertising and sales commissions. All that is in the past now. First the issue expense and now the entry load — all forms of deducting money from investors’ funds have now been shut off by SEBI.

Yet, something tells me that new fund issues will still remain a major force. Perhaps investment analysts had it wrong all along. The strongest reason for new funds selling more may actually not be the marketing push. It could be that people just like new things. Like children in a toy shop, investors like shiny new things, they like the ‘latest’ stuff, just like they do in TVs, cars and music. Further proof of this comes from the kind of consumer-style brand names that that canny fund marketers are thinking up for mutual funds. One of the yet-to-be launched funds listed on SEBI’s website breaks new naming ground—it’s called Ninja! Officially, Ninja stands for Nifty and Nifty Junior Advantage. However, the suggestion of a medieval Japanese warrior fearlessly stealing through the night, weapons at readiness, eyes darting around to look for the next investment opportunity is unmistakable. Wikipedia tells me that Ninjas were stealthy warriors specially trained for assassination, illusion, espionage and sabotage. I’m not sure what any of those have to do with running an index fund. But I guess as long as investors are willing to go by the coolness of a fund’s name, there will be fund marketers willing to think up ever-cooler names.