Tuesday, February 7, 2012

Mutual Fund NFO's - Difficult Times Ahead


Are you wondering “C’mon, Stock Markets are volatile, don’t I know that MF’s will have a difficult time?”. Well my friend, the title isn’t about Mutual Funds having a hard time due to the stock market volatility. That is an imminent part of any Mutual Fund’s life “Dealing with Stock Market Volatility”.

I am going to talk about a new ruling that SEBI has come to an understanding with the MF houses that would make the life of a Mutual Fund Manager difficult.

What is this new SEBI Understanding?

SEBI has proposed that, a Mutual Fund New Fund Offer (NFO) will be approved only if it is able to attract a minimum level of investor interest. To be specific, it will be approved only if a certain amount of minimum corpus is invested in it by the public. For Equity Oriented funds, this amount is Rs. 10 Crores. For Debt Oriented funds, this amount is Rs. 20 Crores.
This essentially means that, lets say ABC MF launches a new fund “ABC Dynamic Equity Multiplier” to the public and the overall corpus to begin with is only 8.5 Crores. In such a situation, ABC MF’s NFO Request will be Rejected. They have to return all the money collected by them.

How this affects Mutual Funds?

Well, this is real bad news. MF Houses cannot offer NFO’s at their will and wish. If there is low investor interest and there are not many buyers, their NFO will be scrapped. This will make the lives of fledgling and small MF houses difficult because, until they can establish themselves in the Indian MF Industry, they wont be able to attract investor money. Unfortunately in this case, unless they attract atleast 10 Crores for equity funds (20 for debt funds) their MF will not even be approved. So, its like a double edged sword for the MF houses.

How this affects Investors?

This is a mixed news for Investors. The Good part is that, if a fund isn’t able to attract even 10 crores worth of investment, it wont probably be able to handle the fund well. Maybe investors don’t trust the fund house or the manager that much. By all means, you may be better off if you dint invest in the fund. The bad part is that, even if the fund manager is good and is unable to attract enough funds due to bad market scenario, the mutual fund may not be approved. But, if you ask me, the good news outweighs the bad news. In almost all cases, a fund managed by a competent fund manager and offered by a reputable fund house, will attract enough funds to be approved.

What happens if the Fund isn’t able to attract enough funds?

If the new fund is not able to attract enough funds (10 or 20 crores as the case may be), then the fund has to be closed and the money invested by the investors (The actual amount invested) has to be returned in the next 15 – 20 days. SEBI has also stated that, if the refund fails to happen within the next 6 weeks (from date of closure) the fund house is supposed to pay an interest of 15% to the investors.

Why this Sudden Move?

Have you ever tried to view details on the total number of mutual funds available for purchase in India? If you haven’t, I strongly suggest you visit www.amfiindia.com and check out the sheer number of mutual fund houses and the thousands of mutual funds available for us. There are 50+ Mutual Fund houses and even if consider each fund house has one fund for each fund category, we are looking at atleast a 1000 funds.

SEBI feels that, fund houses just offer NFOs to attract investments and then lose interest in the fund if it doesn’t attract sufficient funds (As per their considerations). They devote very little interest on such funds and the investor interest is forgotten. Such funds generate dismal returns and investors lose their hard earned money. So, SEBI feels that, if a fund house fails to honor its commitment to investors in one fund, they may not be able to generate investments for any of their subsequent new funds and hence, they will take their jobs more seriously and always take investor interest as the primary factor when it comes to managing the funds.

Happy Investing!!!

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