Mumbai: Indian investors gave a muted response to new fund offers (NFOs) in financial year 2006/07 as compared to the previous year, showing their preference for track records over promising ideas, industry experts said.
Only 24.77% of the total Rs931.5 billion mobilised by equity funds flowed into new funds, as against 43.49% in 2005/06, data from Association of Mutual Funds in India showed.
“The mindset of people has changed,” Aditya Agarwal, joint managing director at fund tracking firm ICRA Online Ltd, said. “They are not just looking at fancy names...they are looking at a solid portfolio backed by performance.”
Inflows into existing funds jumped 41.9% to about Rs701 billion in FY07 over the previous fiscal, data showed.
Backed by aggressive selling efforts and advertising campaigns, new equity funds saw huge interest from retail investors in 2005/06, which also saw India’s most successful equity NFO, Reliance Equity, collecting nearly Rs58 billion.
In the midst of a booming equity market, retail investors thought new funds available at Rs10 per unit were a bargain and saw them as the fastest way to financial success, Dhruva Raj Chatterji, research analyst with fund tracker Lipper, said.
To their surprise, “many of the big-ticket new fund offers of fiscal 05-06 have underperformed in the past one year,” Chatterji said, adding this “may have caused investors to shy away from some of the recent NFOs.” In year to 30 March, less than a fifth of the funds launched in 2005/06 delivered a top quartile return, data from Lipper, a Reuters company, showed.
“They were hot for fund houses and distributors but not for investors,” Devendra Nevgi, chief executive officer, Quantum Asset Management Co. Pvt. Ltd, said, adding that many successful NFOs have seen redemptions.
While funds launched in 2005/06 had some fresh ideas or a focussed mandate, the majority of those on offer in 2006/07 had nothing special to lure investors, fund trackers said.
“NFOs will definitely attract people if they have something different to offer,” Agarwal of ICRA Online said. “In most of the cases (in 2006/07) that was missing.”
Experienced investors, who had seen funds promising the moon but failing to deliver, chose to stay away, Nevgi said. “As investors mature, you can not really lure them with repackaged ideas,” he added.
Adding to the woes of NFOs, the market regulator introduced a rule in April 2006 that restricted open-end funds from amortising issue expenses of up to 6% in a bid to curb generous commissions paid out to distributors who pushed NFOs.
This resulted into a slowdown in fund launches. “Most recent equity NFOs in the last fiscal have been three-year, close-ended funds,” Dhruva said. “This could have subdued investors’ interest in them.”
Half of the 34 new funds launched in 2006/07 were close-ended as compared to only four of 54 a year earlier, Lipper data showed.