In the last few months, New Fund Offers (NFOs) dried up completely because people were in no mood to buy equities and therefore mutual fund houses thought that it is not a great time to float NFOs. But now, as many as five NFOs have opened. All of them are open for subscription. The ICICI Prudential Banking and Financial Services Fund closes on August 8 2008. However, ING Optimix Global Commodities Fund, JM Multi Strategy, JPMorgan India Alpha Fund and Sahara Banking and Financial Services Fund are all still open. There will be more to follow, if the market remains in the green as it has over the last few weeks.
Here are Dhirendra Kumar's views on the New Fund Offers that have opened:
Dhirendra Kumar, CEO of Value Research India feels NFOs are the only way of introducing new money into mutual funds as many fund houses find it very difficult to sell their existing funds. He said he would give the banking funds a pass as the banking industry in itself is tilted.
Excerpts from CNBC-TV18's exclusive interview with Dhirendra Kumar:
Q: What is the re-emergence of NFOs after a few months telling you?Dhirendra: This is the only thing that gets new money. Mutual funds find it extremely difficult to sell their existing funds. NFOs are the only way through which they get reasonable money at one shot. We see a modest resurgence.
There are not too many generic funds. We do not see any infrastructure fund. There are quite a few interesting funds on offer today with two banking sector funds. These funds were probably planned at a point when banking was the booming sector and this was a successful story. There are a couple more funds in the pipeline.
Q: How do you read that the fact that there are no broad-based funds or diversified equity funds, the ones that garnered a lot of money, but more the specialty variety?
Dhirendra: That clearly shows that funds are trying to respond to a situation where investors are unlikely to be responsive to a very generic story. Investors chase performance and it is easy for a fund company, in a roaring market to take the story which has been very successful in recent times. Investors would be asking far too many questions. Everybody carries a niche story.
Q: What would you do with these two banking funds, which have opened, given the interest rate scenario in the country are they good bets or you would led them pass?
Dhirendra: I would pass by them. The Bank Exchange is far too overweight on State Bank of India (SBI) and ICICI Bank because of the free float and their scale. The industry itself is highly tilted.
A good part of the banking sector is not publicly owned because of the presence of foreign banks and they are dominant players as well. So, the PSU Bank Exchange Traded Fund (ETF), available to investors, will be a superior debt because there is no risk of a fund manager or of carrying cash. These funds will also not be able to take sizeable positions, which an index fund will be able to take. For a small sector like banking, the emergence of PSU Bank Index will give you a more predictable and defined sectoral participation than any of the funds.
Q: On the subject of index products, you had a 20% Nifty rally in the last three odd weeks. But many of the index funds are not reflecting that. Is that a cause for concern that index funds are not returning what the Nifty is returning?
Dhirendra: It is extremely disappointing and that clearly shows the incompetence of fund mangers and their inability to replicate the index, let alone doing well enough or guard investors' money. There are a couple of problems. Most fund companies do not take index fund seriously; they have very small assets under management. This is something, which is very disappointing. I do not think investor should forget this.
Index funds do not present a case for themselves. Exchange Traded Funds (ETFs) are far more efficient. They have been able to replicate and they have been able to precisely the match the return of their index. So I think ETFs have done a far better job in replicating the index.
There are some systemic issues in the open end fund as there is some money which is in transition either getting in or getting out of the fund. The allotment in the index funds and the open-end index fund is done on a daily basis. The intra-day volatility would cause some kind of a mismatch.
Money gets accounted for at the end of the day but it actually gets deployed through the next day. So this could be causing a problem. Many of these funds are just too small and they are trying to replicate the index by buying into derivatives. That will also cause some problem besides the expenses.
Q: ING Optimix Global Commodities Fund was perhaps conceived when commodities were in the tearing bull run but in the last few weeks things seem to have changed around a bit in the whole global commodity complex, how would you approach this NFO?
Dhirendra: I would approach it as a very interesting vehicle, which would enable participation in different geographies. I will still be looking at it positively because of its global diversification. Access to our homebuyers is very strong, but nobody has any meaningful diversification globally. So this could be an interesting pick.
Q: What about the India Alpha Fund from JP Morgan? Do you think it will work? Will it attract lot of retail participation or only very few expert HNIs who understand what they are trying to do?
Dhirendra: I would put my decision on hold. I find this fund very interesting and a slightly different kind of arbitrage fund. Investors not being able to participate at the outset will not have a significant miss. If one looks at the benchmark, it clearly says that the liquid fund index is going to be the benchmark. So one is not missing out on anything substantial. I would like this fund to prove its mettle for a while. It is not going to be an equity fund. It is going to be a slightly sophisticated arbitrage fund.
Q: What kind of return do you expect from such a fund?
Dhirendra: If they succeed then it could be substantial. It could be quite meaningful. But if they fail then there is a risk involved as well. There will be four fund managers hard at work on this fund. That could be an advantage or a problem. I would allow this fund to prove its credentials at least for two-three months.
Q: How would you approach JM Multi Strategy Fund? Does it seem like an interesting opportunity?
Dhirendra: Yes, it is an interesting opportunity. But it is not the sort of fund, I would entrust my money in. I do not think that this is going to be an all weather fund. This fund companies are at the bottom of the pack.
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