Do record NFO collections of SBI and ICICI mutual funds suggest retail investors are ready for more?

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New fund offers (NFO) from mutual funds are breaking records once again. Last week, SBI Balanced Advantage Fund (SBAF) collected around Rs 14,500 crore – the highest ever for an open-ended equity fund during its NFO period. In July, ICICI Prudential Flexicap Fund (IPFCF) collected the highest-ever NFO amount up until then (Rs 9,500 crore), a record that was broken just a month later. Are investors really all that keen to invest in NFOs when the Sensex is at well over 57,000 points? Or are fund houses pushing NFOs again the way they did at the height of the 2017 bull-run?

Lack of options

To be fair, investors are drawn to mutual funds this time around. They don’t have too many options to invest in. Fixed deposit (FD) rates are low. Meanwhile, equity markets have run up. Large-cap shares are up by about 72 percent from March 2020, while mid-cap stocks rose around 91 percent. Small-caps have rallied 111 percent in the same period.

There were many investors who had missed out on the equity run over the last year. Between March and December 2020, equity funds saw a net outflow to the tune of Rs 9,571 crore. Mahesh Mirpuri, Founder of Invest Mutual says, “Investors send me advertisements of NFOs in newspapers. They’re interested in knowing if they should be investing. People who have already missed out on last year’s equity rally don’t want to miss the bus now.

The COVID-19 lockdowns that resulted in little or no travel being possible and less avenues to spend. It has also left extra money in people’s pockets, says Swarup Mohanty, CEO, Mirae Asset Global Investments (India). But mutual fund distributor Ashish Shah, founder of Wealth First says that it’s not just that investors are waking up investing in mutual funds. “Last year, investors invested big time in direct equities. They withdrew money from mutual funds, partly because they weren’t happy with mutual funds’ performance.

As per National Stock Exchange, as opposed to just 8.5 lakh new registrations on the NSE in financial year (FY) 2019, new registrations jumped to 20 lakh in the same period during FY 2020 and 51.3 lakh in FY 2021. Meanwhile, mutual funds returns are back, too. As per a recent IDFC Mutual Fund report, the 2-year returns of equities were -1.4 percent to just 2 percent across various equity segments. On a 3-year basis (just on the back of the past year and half performance), three year returns have jumped to up to 46 percent. “It’s not just mutual funds; people are investing in equities through multiple ways,” says Shah.

Capturing the market’s mood

One of the reasons behind the two NFO’s high collections was what they offered in times such as these. SBAF switches between equities and debt based on market levels. Higher the markets, lower will be its equity allocation. In current markets, the scheme would invest just about 30 percent in equities. “People want solutions,” says D.P. Singh, Chief Business Officer, SBI MF. “They don’t have the time to manage their portfolios; they want expert advice. Besides, not everyone can afford a wealth manager. For all of them, a balanced advantage fund works.

He has a point. Between March and December 2020, Balanced Advantage Funds saw a net outflow of Rs 5,214 crore. But as equity markets continued its march up, investors poured money in BAFs; a net inflow of Rs 12,949 crore so far in 2021.

Similarly, ICICI Prudential Flexicap Fund offered flexibility; the scheme can invest across large, medium and small sized companies. Some distributors say that that the fund house also communicated to its investors that the scheme would deploy money over time; a strategy that usually works in overheated markets.

A bank’s strong push

What also helped these two NFOs was that their fund house’ sponsor firms were banks who also act as in-house distributors. Nearly Rs 3,500 crore of IPFCF’s collections came from ICICI Bank. And nearly Rs 6,000 crore in SBAF came from State Bank of India. As per a June 25, 2021 CARE report, banks got more deposits (incremental growth of 12.3 percent year-on-year) outpacing the credit growth (5.6 percent). A slow credit offtake meant that banks didn’t find enough avenues to lend and earn money. What did they do?

A chief executive officer of a large-sized fund house says that banks, then, appear to have turned to “NFO sales, to earn additional income.” While the push helps bring in new investors into the MF fold, industry insiders point out to some cases of mis-selling that have come up on social media. Singh of SBI MF refutes the charges, strongly. “There may have been stray cases but the SBI takes this very seriously. There is zero tolerance in SBI about mis-selling,” he says. Moneycontrol could not independently verify such mis-selling cases. SBI did not answer to Moneycontrol’s queries.

Experts say switches a section of distributors also nudge investors to switch from existing schemes to new schemes. The month-end data is yet to come, so estimates cannot be drawn at the moment. But Pune-based distributor Amit Bivalkar, director at Sapient Wealth says not more than 30-35 percent of a new scheme’s inflows can be attributed to such churn.

Some fund houses believe there is a better way to bring in new investors; by marketing existing schemes. In August, DSP Mutual Fund announced an ‘old fund offer’ and pushed its DSP Flexicap Fund, a 24-year old scheme. “Getting such scale in NFO is commendable as it expands the universe of mutual fund investors. At the same time, we felt the need to highlight long-term track record of our oldest scheme via our OFO and encourage investors to stay invested for long. We added Rs 900 crore in our Flexi-cap OFO, as opposed to our usual (monthly) inflows of around Rs 300 crore,” says Kalpen Parekh, managing director & CEO, DSP Investment Managers.

Should you invest in NFOs?

Unless a new scheme offers you something new that other existing schemes don’t, there is no real compulsion to invest in a NFO. Just make sure you invest regularly and allocate adequately across assets, so that you don’t felt left out when a big bang NFO suddenly comes along.