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NFOs to Get Investor-Friendly

The SEBI crackdown will span NFOs to make for a better investor environment

The Securities and Exchange Board of India (SEBI) has targeted all investor-unfriendly practices that were rampant in the mutual fund space.

In SEBI’s eyesights were not just the distributors and agents, but also the asset management companies (AMCs), which encouraged such tendencies by offering greater incentives and commissions to hard-sell products that benefited them, rather than the investors.

While some of the most blatant ones have been checked by SEBI, like the ban imposed on charging of loads, but now the attention seems to have moved further into the making of new fund offers (NFOs) too.

NFOs are already facing the ire of SEBI as the ban on charging of commissions has ensured that very few new ones have been unveiled, and through the new attack SEBI is seeking to ensure greater transparency that will reveal each step of the process, virtually, that the funds will be taking.

In an interview on Mint, the recently-appointed SEBI Executive Director K.N. Vaidyanathan says that the NFO documents must disclose more than what they are currently doing. More than that, he said, "NFOs must justify investment strategy and risks”. He says intention is to send the message that, “The game of garnering money through NFOs is over”.

Among the steps that SEBI is considering taking is to unveil a new NFO document that will reveal what the investment objectives are, what will be the risk and mitigating factors so that the investor can make a more informed investing decision, rather than jumping in the dark. Vaidyanathan says that the MF should tell the investor, “I propose to do the following....”

Also, to pre-empt and terminate forever, the funds' habit of being NFO-happy, Vaidyanathan said that they will now have to justify why they are launching a NFO to raise new money and not going through their earlier schemes, whose performances can be checked easily by investors. The fund house will have to explain, says Vaidyanathan, “How is 'A' different from what I have (offered) in the past”.