Volatility, redemptions from schemes hit mutual fund NFO proposals

The number of proposals for new fund offers (NFOs) filed by mutual fund houses with market regulator Sebi slumped 64 per cent to 41 in the first nine months of 2020 largely due to high volatility, uncertainty in the market and redemptions from established schemes.

Some experts attributed the decline in NFOs to mutual fund categorisation and rationalisation by Securities and Exchange Board of India (Sebi).

In comparison, such proposals stood at 114 in January-September 2019, data available with Sebi showed.

Fund houses approached Sebi for as many as 11 NFOs in January 2020, the number fell to six in February and further dropped to just one in March and nil in April. It was six each in May and June, eight in July, one in August and two in September.

" NFOs with Sebi had fallen in the first quarter of the calendar year due to fall in markets and then in the second and third quarter of the calendar year due to negative trend in flows in the mutual fund industry," said Divam Sharma, co-founder of Green Portfolio.

Nikhil Kamath, co founder and CIO True Beacon and Zerodha, said there seems to be uncertainty on the survival and continuity of a lot of industries and business models in the Covid-19 era.

"During this time, it's a crisis of consumer demand and not a liquidity crisis. High volatility and uncertainty in the market has caused fund houses to avoid or delay NFOs," he added.

In addition, established schemes are seeing redemptions, investors are facing salary cuts. These are some of the reasons fund houses has chosen to avoid new products.

Pursuant to the announcement of the mutual fund categorisation and rationalisation by Sebi in October 2017, there was a an uptick in NFOs in 2018 and 2019 as fund houses looked to fill gaps in their existing offering across categories, said Gautam Kalia, Head – Investment Solutions, Sharekhan by BNP Paribas.

This re-categorisation activity is now mostly complete and this is one of the reasons for decline in new launches in 2020, he added.

In similar vein, Sameer Kaul, CEO and MD of TrustPlutus Wealth Managers (India) said Sebi recategorisation has reduced duplication of funds in same category, adding that some NFOs have also been postponed due to lockdown.

Between January and September 2020, draft documents for 41 NFOs have been submitted with Sebi. Of these, some of the schemes have already been launched after getting regulatory clearances.

Out of these NFO requests filed with Sebi, a large chunk of these offerings are passive funds.

Investors want safer assets. Therefore, there is a rise in passive and index funds over active funds, Kamath said.

Echoing Kamath’s views, Gopal Kavalireddi, head of research at FYERS said the schemes gaining traction belonged to index funds and exchange-traded funds (ETFs).

"With active mutual funds delivering returns below investor expectations in the recent years, investors chose ETFs to lower their costs while taking advantage of the stock market lows," Kavalireddi said.

Passive funds are slowly gaining traction as such funds do not need minimum assets under management (AUM) and investor count.

Further, themes like ETFs and environment social and governance (ESG) attracted of mutual fund companies. Besides, many mutual fund companies filed applications for index funds.

UTI MF, Aditya Birla Sunlife MF, Axis MF, PGIM India MF, HSBC MF, Edelweiss MF, Motilal Ostwal MF and Mahindra MF are among the fund houses that approached Sebi with the offer documents for NFOs during the period under review.

Going ahead, Divam Sharma said multicap funds NFO will get deferred as investor interest in such funds have fallen post the new allocation rules by the capital markets watchdog.