Moneylife advocates avoiding NFOs, especially when too many of them are launched to take advantage of a roaring bull market. Here is more evidence that proves our point: almost half of NFOs were redeemed at losses during April 2008-March 2010
Many Asset Management Companies (AMCs) launch New Fund Offers (NFOs) to fatten their corpuses during a major bull run. While it is good for the fund companies, these usually leave a hole in investors’ pockets, since the markets tank subsequently. Disgusted with losses, investors exit NFOs at a loss. Not surprisingly, some 49% of investments in NFOs launched during April 2008-10 were sold at a loss, according to a Computer Age Management Services (CAMS)-Boston Consulting Group (BCG) study. The study found that only 22% or Rs1,546 crore was redeemed at a minor profit — Net Asset Value (NAV) between Rs10-Rs11. On the other hand, 29% or Rs2,044 crore was pulled out by investors at an NAV between Rs11-Rs12, indicating some profit booking.
In rupee terms, out of Rs6,993 crore redemptions from NFOs between April 2008-2010, only 50% was redeemed above par value. Within the remaining 50% redeemed at profit, nearly 22% was redeemed at an NAV of less than Rs11, implying a return of less than 10%. As many as 69 new equity schemes were launched during this period.
Typically, a new scheme is sold at Rs10. Around 49% of redemptions happened when the NAV went below Rs10. “NFOs were paying higher amount of money for advertising and publicity, during this period. The entry load also existed at that point. The stock market also crashed during 2008 and recovered towards the middle of 2009,” said Debashish Mohanty, country head – retail sales, UTI MF. “All this made investors hastily exit at a loss,” he added.
During the entry load era, out of Rs100 invested in NFOs, investors used to get units equivalent to Rs95 after deducting the annual expenses and entry load. Distributors were heavily incentivised to sell NFOs by offering upfront commissions, target-based incentives and a chance to win foreign trips, which resulted in rampant mis-selling of NFOs. However, it was also a case of mis-buying on the part of investors who usually cannot identify that NFOs are just like new wine in old bottles which end up buying the same stocks as the existing schemes at much higher prices.
Investors also have a misconception that old schemes that have higher NAVs are expensive and new schemes which come with an NAV of Rs10 are cheaper. Neither the AMCs nor the distributors tried to dispel this notion.
Market watchdog Securities and Exchange Board of India (SEBI) had abolished entry loads in August 2009. Recently the regulator also mandated fund houses to stop using investor money for marketing and distribution activities. Currently, investors are allotted full units equivalent to the amount invested. —Moneylife Digital Team
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