90 days on, MFs line up NFOs as embargo lifts; a dozen schemes expected

Domestic mutual funds (MFs) go into overdrive to launch a clutch of new fund offers (NFOs), following the end of a three-month embargo. Industry players say about a dozen NFOs in the equity and hybrid categories will kick off over the next few weeks as asset management companies (AMCs) look set to take advantage of pent-up demand and fall in valuations.

On Tuesday, Edelweiss AMC’s multi-cap Focused Equity Fund and WhiteOak Capital Flexicap Fund opened to subscription.

Next week, Quantum AMC's first index fund will open for subscription.
 

Since April, the Rs 37-trillion MF industry has not rolled out a scheme due to delay in implementation of the new norms around pooling of investor funds that were to come into effect on April 1.

Between June 2021 and April this year, equity and hybrid NFOs have helped mop up Rs 67,400 crore. Experts say the resumption of NFOs will help support inflows into equity schemes, which are key to offset selling by foreign funds.

“Although we have seen a spike in volatility, domestic investors are not in panic mode. Flows continue to remain strong. Fund houses will aggressively look to spawn NFOs, which will only support existing flows,” says Arun Kumar, head of research, FundsIndia.

Notwithstanding a correction in stock prices and the ban on NFOs, month-on-month flows into equity schemes have moderated. Positive flows have largely been supported by systematic investment plans. In June, equity schemes logged their 16th straight month of positive flows. They stood at Rs 15,498 crore - 18 per cent below the 2022 average.

The Securities and Exchange Board of India (Sebi) allows fund houses to launch only one open-ended scheme per category. As a result, AMCs can only launch new schemes to fill product gaps.

“One should look at NFOs only to fill gaps in current product offerings. Current gaps in client portfolio could be in international investing, low-cost index funds, and smart-beta strategies,” says Tarun Birani, founder and chief executive officer, TBNG Capital Advisors.

Over the past few weeks, AMCs have filed their offer documents — a precursor to an NFO launch — with Sebi. Industry players say the actual number of roll-outs will depend on the response to the initial few launches.

“As a thought process, a lot of AMCs will want to launch now when inflows are still robust and the entry point is better. But depending on investor response to the initial crop of NFOs, AMCs may tweak their plans,” says Kumar.

“Normally, NFOs are timed when investment sentiment is at its zenith since it results in higher inflows,” adds Birani.

While monthly flows signal bullish sentiment, a correction in the market and concerns around monetary tightening could discourage investors from making huge lump-sum investments. Even if investor response is meek, a fall in valuation could be an opportune moment to launch new schemes, they believe.

“The recent fall provides a better entry point and will benefit funds. This can help them acquire good flows a few years down the line if performance passes muster,” observes Kumar.