Mutual funds find allotment of units within five days of closure of an NFO to be a tall order, reaching to smaller towns may prove difficult, finds team Cafemutual
Mumbai: Market watchdog SEBI’s recent reduction in the period of new fund offer (NFO) process has made life more hectic for fund houses. In an attempt to streamline the NFO process, SEBI recently mandated asset management companies (AMCs) to cut the timeline of new fund offers from the existing 45 (for close-ended funds) and 30 days (open-ended schemes) to 15 days, barring equity linked savings schemes (ELSS). Further, it asked fund houses to make allotment of units, refund money and dispatch account statements to investors within five days post the NFO closure. The rule has come into effect from October 1, 2010. According to market participants, allotment of units and dispatch of account statements within this short span of time has become a challenge for the fund houses and especially RTAs due to time constraints as the process involves a lot of back end work.
“Reduction of the NFO period to fifteen days does not have as much impact as reducing the allotment of units in five days. The big change is that you have to allot everything in five days. Given the fact that applications forms have to travel across the country to a single point after which the verification and banking of those instruments have to be done make it a big challenge,” says a sales head of a private mutual fund.
Experts are of the view that while the practice of investing in funds via the online channel can help, online transactions will take some time to become widely successful as MFs lack the infrastructure which is available for stock brokers. The current practice of investing via the physical route thus continues to co-exist with the online route.
Applications can also be sent directly to RTAs by scanning which cuts down the time for delivering the applications. CAMS also recently launched its e NFO platform where in investors can electronically subscribe to NFOs.
Typically, a major chunk of money in a new offer flows in the last 3-4 days of the NFO period. Fund houses will now be required to commence their marketing activities fifteen to thirty days before the launch of a fund. Some industry players say that AMCs will now limit the distribution of new schemes to only top twenty five to thirty cities. Reaching to smaller towns may prove to be difficult for fund houses within 15 days. Reliance Mutual Fund which recently launched its Reliance Small Cap Fund restricted its offer to the top thirty cities. It received around one lakh applications in five days. “A large portion of that was managed through a complete paradigm change in the way that process was handled earlier and the new format of NFOs coming in. We made sure that technology is made available to the bankers of the issue for scanning and sending them to the central office in Hyderabad. As the scanning was happening at say Dehradun, Chennai or Delhi, we were processing it instantly at Hyderabad. We were not dealing with multiple banks. Typically an NFO opens in 150 locations or more,” said V Ganesh, CEO, Karvy Computershare Pvt Ltd.
“There are a lot of things like inward process, cheque clearing process, transmission and data entry which need to be done. Earlier, the first 30 days were used to do road shows and other things, so that lead time will go. Now they can do the road shows first and then declare NFO. It will require some time to warm up the channel,” says a marketing head of a leading fund house requesting anonymity.
“Because of the limited number of days, the application collection from far off places takes time. By that time NFO is over. You have to allot the units within five days. People will redevelop their NFO strategies to suit the regulation. We have to send the applications much before the NFO starts. Only acceptance of applications will take place during NFO period. Suppose some application is received from Muzaffarpur, the cheque needs to be cleared locally, and then the application will come, and then RTA will capture it. Five days are not enough to allot units. People will be wary of selling in smaller towns. Around five hundred cities were activated before this new rule. Now they will activate less number of places,” says a sales head of a leading fund house preferring anonymity.
