The net inflow of Rs 26,000 crore in equity schemes of mutual funds in the first five months of 2014-15 indicate the revival in investor sentiment following a strong performance by equity markets that saw Sensex breach six milestones (22,000 to 27,000) in the last six months. While net inflows have been highest since 2007-08, the mutual fund industry has been quick to respond and take advantage of the growing investor confidence in equities and have already launched 24 new fund offers over the last five months thereby raising a total of Rs 3,631 crore. If that many have already come in, there will be many more lined up as the months of July and August 2014 saw fund houses file draft offer documents for 25 equity schemes to be offered to the investors with the capital markets regulator. With a push from the distributor, in a rising market, NFOs may seem to be a great investment proposition to participate and benefit from a rising market especially for first time equity investors. However, a little research will suggest that it may be more prudent to go with existing schemes of fund houses where investors can look for ones with consistent performance and also check the fund manager’s track record rather than putting the money in a new scheme. Why so many launches? The industry has been through a rough time — partly because of regulatory changes (ban on entry load) and partly on account of weakness in the equity markets and investor sentiments over the last few years. While the net inflow into equity schemes of mutual funds stood at Rs 40,782 crore in the financial year 2007-08, the highest net inflow in the six years that followed was in the year 2008-09 when it stood at Rs 1,056 crore. In fact, three of the six years witnessed a net outflow with the highest being in the year 2010-11 when the net outflow rose to Rs 13,405 crore. The equity funds also witnessed a sharp decline of 30 per cent in the number of folios from 4.17 crore in March 2009 to around 2.92 crore in March 2014. It is after these six painful years that the industry is witnessing a return of investors into equity funds. The first five months of the financial year 2014-15 have been very encouraging and the net inflow into equity schemes crossed Rs 26,000 crore till August. Even the number of folios in equity schemes have risen since March 2014. In the four-month period between April and July 2014, the number of equity folios have gone up by 1.32 lakh from 2.918 crore in March 2014 to around 2.93 crore in July. Sensing the opportunity, it was only natural for the industry to take advantage of the situation and mobilise funds from the market by launching NFOs. While in the calendar year 2008 the number of equity NFOs launched stood at 41, the numbers dropped significantly in each of the next five years. However the first eight months of calendar 2014 has seen a sharp rise in NFO launches and the number has reached 38 till August through which fund houses have raised Rs 4,556 crore, which is a six year high. While 38 have already come, there are many more that will come your way in the near future. It is interesting to note that close-ended equity schemes have led the NFO launch this calendar year and 22 of the 38 schemes launched are minimum three year close-ended products. While the close-ended products provide certainty to the fund managers in terms of the duration for which the money is available to them, experts feel that while it makes sense for fund houses to launch such schemes, it may not be the best bet for investors. “There is no evidence that close-ended funds perform better than open-ended funds. I think that in case of open-ended schemes, the fund manager works hard continuously whereas in close-ended funds the pressure is not so much on the fund manager as the money won’t go out even if there is an underperformance for a quarter or two,” said Dhirendra Kumar, founder and CEO Value Research. “For several fund houses one can see that open-ended funds have done as well or better than close-ended funds.” Should you take the NFO bait? While the economy and markets are on a rise, it makes sense to have adequate exposure to equities depending upon the risk profile of the investor. Though mutual funds should be the preferred mode of investment for retail investors, it may not be the best bet to go with the new funds that are on offer. Many investors have a misconception that Rs 10 NAV (net asset value) quoted by a new scheme is cheaper than a Rs 25, Rs 40 or Rs 50 NAV being quoted by an existing scheme. Mutual fund advisors, too, feel that it is a big factor and a lot of investors think that Rs 10 NAV is cheaper. “People get attracted to NFOs because there is a big problem that they think Rs 10 NAV is cheaper,” said Surya Bhatia, a Delhi based financial planner. NAV per unit is simply the market value of assets in the portfolio minus expenses and divided by the total number of units. Suppose there are two schemes A (existing) and B (NFO) having identical portfolio and have NAVs quoting 50 and 10 respectively. If you invest Rs 10,000 in each on the same date and the value of the portfolio grows by 20 per cent after two years then the return of both the schemes will be same 20 per cent and the value of your investment will be Rs 12,000 for both of them. While for ‘scheme A’ the NAV will rise to 60 that of ‘scheme B’ will rise to 12. The NAV does not affect growth of investment. Experts say that investors should go for NFOs only if there is an attractive theme. If the NFO is a replication of a theme on which a good performing scheme exists, then one should go with the existing scheme. “Investors should be careful while investing in these NFOs. Unless there is a new theme and a compelling reason for one to invest in them there is no point going for them. Instead pick up a good performing scheme which is managed by a reputed fund manager,” said Bhatia.
