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Finally, Funds get their NFOs Right

Most equity funds launched after September 2013 have posted substantial gains, primarily because their timing has been right

There's been one set of investors who've reaped an unexpected bonanza from this post-election bull run - those who took a contrarian bet on equity New Fund Offers (NFOs).

Did you invest in the ICICI Prudential Value Series I or II in October 2013? No? Had you done so, you would be sitting on neat gains of 29 and 24 per cent respectively on your investment in barely six months. The Birla Sun Life Banking and Financial Services Fund, a November launch is up over 33 per cent already. Why, even the government has shown surprisingly good timing with the Goldman Sachs' CPSE ETF up over 40 per cent from its allotment price of ₹17.45.

In fact, most new equity funds launched after September have fared well, averaging gains of about 7 per cent for one month and about 16 per cent for the last three months. That's good to see for two reasons.

Timing it right
In the past, the Indian mutual fund industry has displayed a knack for flooding the market with NFOs at the wrong times. So much so that a bunching up of NFOs has become a good contra-indicator of a market peak. The first quarter of 2008 - the end of the last bull market- saw 18 new equity funds raking in a record sum of over ₹18,000 crore. But this time has been different. Equity NFOs started trickling into the market from September 2013, when pessimism was quite high. With the equity NFOs hitting the market between September and April, they've all been able to make the most of the post-election rally.

“When we launched the Banking and Financial Services Fund, we did not expect such a quick rebound in the markets. We took the call that GDP growth had to improve and that the theme was a good play on recovery. Mainly, the stocks were available at low valuations. But the timing proved to be good and now we're confident the worst is over", says A .Balasubramanian, CEO of Birla Sun Life Mutual Fund.

True, as they were launched in beaten-down markets, the NFOs didn't collect big money, with the total collections on the two dozen funds at about ₹2,900 crore. However investors who went against the tide to bet on these funds have been big gainers.

Beaten down themes
Another reason for the good returns is that these NFOs mostly played on attractively valued themes rather than momentary market fancies.

Whenever the industry went on an NFO spree in earlier years, new funds usually flocked to the flavour of the season, whether it was tech funds in early 2000 or infrastructure funds in early 2008. Investors inevitably lost money, hit by the double whammy of investing at a market peak and that too in over-valued sectors and stocks.

The fund industry seems to have avoided this trap this time around. Though defensive themes were much in vogue last year, the NFOs have been based on value, banking and financial services, small and midcap stocks. (Yes, one set of recent NFOs which are trading below par are international funds, but these funds were never meant to be short term vehicles to beat the Indian market; they are just good currency diversifiers for one's portfolio.)

For once the industry seems to have launched products that could maximise returns to the investor, rather than assets for the fund house. That should pay off now, as investors who have bet on these funds have a good return experience to show for it.

Well, it is not just investors who are pleased with this happy turn of events, but fund managers too. With the tide turning for equities after a long spell of five years, portfolio managers are eager to unearth stocks that can quickly join the party.

There's not much new money to deploy because retail investors have been pulling out money from the older equity funds. But NFOs put new money in the hands of the portfolio manager.

In fact one leading fund house which recently launched a Midcap NFO had the satisfaction of placing some big buy orders this week and had the midcap index soaring by some 4 per cent, thus lifting the NAVs of all the older midcap funds too!