VR Logo

Better Than Nothing

New Fund Offer. NFO. The powers that be have decreed that what were called fund IPOs till now will now be called NFOs.

New Fund Offer. NFO. The powers that be have decreed that what were called fund IPOs till now will now be called NFOs. So far, so good. Of the various objections that we at Value Research have stridently raised to the way fund IPOs are being structured and sold, one was definitely about the use of the term IPO. We believe that just by calling a fund launch an 'IPO', AMCs are establishing certain implicit similarities between new funds and stock IPOs in the minds of investors. The problem was that all these similarities were completely fake and amounted to dishonest selling.

Of course, there are many other problems with NFOs née IPOs, not the least of which is the fact that many AMCs charge launch expenses to investors by amortising them over a long period, usually five years. This means that investors who stay with the fund get saddled with expenses that should have been paid for by those who quit early. This is a strange way of bringing out a 'no-load' fund. There is no possible way in which the use of the phrase 'no-load' in selling such deferred-load funds can be considered to be anything but a lie. And clearly, there are two problems. One, that there actually is a load; and two, far worse, that one investors' load may be paid by another.

This is a very straightforward problem for the regulator to fix, and one where the right thing to do is so clear and obvious that hardly a moment's thought is needed to see what should be done. Deferred charges should be done away with and everything that the AMC intends to charge the investor must be subtracted from the very first NAV that is declared.

But that's quite enough carping and quibbling. When I step back and take a holistic view, I do think despite all their problems, the success of the recent spate of fund IPOs is heartening. Sure, a certain part of the money must be just switched across from other funds but anecdotal evidence leaves me in no doubt that the marketing campaigns of funds have generated a great deal of awareness among those who weren't investing in funds earlier and many such people actually have invested in funds for the first time now.

Given that a large chunk of such investment has come into equity funds, I'm sure that in the long run, much of this money will yield returns that are greater than that of fixed-income alternatives. In this context, what matters is not whether funds' performance is better than their benchmarks or peers, but whether it is better than what the investor would have done with that money otherwise. As long as these equity funds do better than seven or eight per cent long-term, they will succeed in buying investors into the idea of investing in funds. And under any circumstances, these investors will be much better off than gamblers pretending to be day traders.

Even better, some of this money would surely have gone into consumption expenditure had it not been invested into mutual funds. When investment vehicles are advertised and marketed heavily, there must be some people who end up investing money that would otherwise have been used up in buying clothes or pizza or whatever.