SEBI says large investments in NFOs during 2001 and 2009 were a result of mis-selling by the industry and that the ban on entry load from August 1, 2009 has removed the ills that inflicted NFOs. SEBI has gone to the extent of saying that mutual funds have adjusted well to the changed operating environment, write Rajendra Palande & Ravi Samalad.
Mumbai: The Securities and Exchange Board of India (SEBI) has said the net inflows in mutual fund schemes from 2001 to 2009 was on account of wrongly-sold new fund offers (NFOs).
During the nine years, the investments in existing schemes and redemptions had more or less matched, the regulator said in its paper on the ‘Status of the Mutual Fund Industry – Post Entry Load Ban’, which was placed before its board of directors last month.
It pointed out that since the abolition of entry loads from August 1, 2009, NFO inflow has been much less and coupled with outflow because of market factors, the industry had net outflow.
SEBI admitted that the fall in investments via NFOs was significant. It dropped to Rs 4,000 crore in the year ended July 31, 2010, from about Rs 25,000 crore a year earlier.
It, however, pointed out that NFOs were being wrongly sold earlier. It listed three ills that it claimed had infected the NFO obsession.
The three ills, according to SEBI, were: 1. Schemes launched as NFOs were similar to existing ones with just a minor change in strategy; 2. NFOs at Rs 10 per unit were being sold as if they were cheaper than the units of existing schemes, which were sold at their net asset values (NAVs); and 3. Upfront commissions of 5-6 per cent incentivised distributors to sell NFOs rather than the lower-earning existing schemes.
“It is wrong on the part of SEBI to accuse the entire industry of wrong doing. Fund houses have done good for investors even in the days of NFOs,” said the CEO of a mutual fund, who did not want to be identified.
SEBI management conveyed to its board that the asset management companies (AMCs) have done well to adapt to the new environment and that there is less reliance on NFOs which could encourage product consolidation over the medium term.
The regulator said efficiency in cost management augurs well in the long-term and better risk adjusted returns from AMC business is expected to evoke increased attention from sponsors.
In the 12 months since the abolition of entry load, the gross inflow into existing as well as NFOs amounted to Rs 63,000 crore. SEBI said at an average of 2 per cent commission, the ban saved Rs 1,260 crore of retail investors’ money.
The CEO said what SEBI should have mentioned in the report is the fact that a lot of small distributors have gone out of business. “There is no one to serve investors who want to invest even a decent amount like Rs 25,000. There is also no one performing the task of bringing newer investors into the mutual fund fold,” he said.
