Mutual funds garner nearly Rs 1 lakh crore via NFOs in 2021 on sharp rally in stock market

Mutual fund houses launched 140 new fund offerings (NFOs), which collected about Rs 1 lakh crore in 2021 on a sharp rally in the markets and an exceptional increase in the retail investors' interest.

However, the current volatility in the stock market might prompt asset management companies (AMCs) to limit the launch of NFOs this year, said MyWealthGrowth.com co-founder Harshad Chetanwala.

Ankit Yadav, wealth manager (USA) and director of Market Maestro, also believes that NFOs are going to decrease in 2022 and little will come in 2023 when rates start changing.

According to data compiled by Morningstar India, there were 140 new fund offers (including closed-end funds and ETFs) in 2021. These managed to garner a respectable Rs 99,704 crores during their inception stage.

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This was way higher than 81 NFOs floated in 2020 and cumulatively, these funds were able to garner Rs 53,703 crore.

"Given the sharp rally in the markets along with the need to fill product gap created post-recategorisation and giving investors new themes to invest in, asset-management companies launched a plethora of new schemes across the year (2021)," Morningstar noted.

Usually, NFOs come during a surging market when investor sentiments are high and optimistic. The stock market along with the positive investor sentiments kept surging post-March 2020. It is from this point in time the launch of NFOs started, Chetanwala said.

The NFOs were floated to capitalise on the mood of investors and attract their investment as they were willing to invest at that time, he added.

"The main fact as a wealth manager I see in low rate scenario is that the borrowing becomes easy with easy money fluctuating around businesses tend to bring their IPOs and AMC (assets management company) businesses are inclined NFOs," Market Maestro's Ankit Yadav said.

In 2020, the central banks throughout the globes cut the rates and made rates hit all-time lows in the 100-year history. Rates remain unchanged in 2021. That's why to utilise low rates, AMC businesses bring NFOs, he added.

The maximum number of funds (25) were launched in the index fund segment, which amassed Rs 4,082 crore, followed by other ETFs (24), which collected Rs 7,482 crore and fixed-term plans (23), which mobilised Rs 5,057 crore.

In addition, investors were attracted to international funds and sectoral or thematic funds. The AMCs launched 12 sectoral or thematic funds, which raised Rs 13,237 crore and floated 12 overseas funds of funds, which mopped up Rs 6,351 crore.

Experts believe that the dominance of index funds and ETFs (exchange-traded funds) within NFOs is not surprising, owing to a couple of factors.

Existing AMCs have no restrictions in the number of passive products they can manufacture, whereas there are limits on other types of funds, Vasanth Kamath, founder and CEO at Smallcase, said.

"Also, as investors (across retail, HNIs, institutional) are broadening and diversifying their portfolios, they're preferring to take an index approach to new exposures and asset types, making it both efficient and simple versus having to build their own frameworks and strategies on these universes," he said.

In addition, the staggering growth of new demat accounts requires fund houses to offer a larger, diverse line-up of ETFs that were missing in the exchange-traded form factor, he added.

Another factor for higher NFOs in the index category could be strong performance as the index delivered over 20 per cent last year.

Further, the penetration of Indian investors towards index or ETF is low. So, AMCs try to capture their market share, Market Maestro's Yadav said.

Similarly, international stock markets had given good returns in the past few years and even the interest of investors to diversify across geography increased, which resulted in many AMCs coming up with international funds.

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