The Hindu Business Line : AMCs struggling to prevent funds erosion

While distributors, who hold the key to directing investments into funds, rake in the moolah, AMCs are left to rack their brains about the next product idea.

Mumbai , March 9

SURPRISED at the staggering sums being collected by mutual funds during initial public offers? Don't be, most of the money collected is from the same set of investors who redeem from other funds to invest in these IPOs.

In fact, asset management companies are entering a vicious cycle of new product launches in order to hang on to their assets under management.

Mr Nikhil Johri, Chief Operating Officer, ABN Amro Asset Management, concedes that the launch of the ABN Amro Opportunities Fund was advanced by three months purely to counter the erosion of funds from their equity fund to other fund houses' IPOs.

ABN Amro's Equity Fund closed its initial public offering with Rs 400 crore in its kitty. This sum has now reduced to Rs 250 crore.

Similarly, HDFC's Core and Satellite Fund, collected Rs 400 crore during the IPO; the fund currently manages Rs 358 crore.

Tata's Dividend Yield Fund, collected Rs 417 crore during its IPO, which has now shrunk to Rs 389 crore. Recently, its Infrastructure Fund collected over Rs 774 crore, which is now pegged at Rs 767 crore.

Also, Reliance's Power sector fund started with a corpus of Rs 415 crore, and is now at Rs 303 crore.

AMCs say that investments during IPOs are high because of advertising and other such aggressive promotion activities. The real reason, however, which AMCs reluctantly concede, is that brokers are paid much higher brokerages for selling mutual funds during the IPOs and they in turn ask the investors to switch from one fund to another.

Distributors, third party and bank, give aggressive targets to their sales people and while a part of this is met by new investments, the rest of it is effected by getting existing investors to switch from one fund to another.

Distributors say that investors are easily convinced about new products as these have a higher visibility, in terms of advertisements etc.

Fund houses are restricted by the expense ratio of the fund to advertise schemes whose IPOs have closed.

Further evidence of switching from current schemes to IPOs is evident from the fact that, even though fund houses have collected over Rs 4,000 crore in the last couple of months from IPOs, the percentage of equity funds' assets under management, has remained constant at 21 per cent, according to data from the Association of Mutual Funds in India.

While distributors, who hold the key to directing investments into funds, rake in the moolah, AMCs are left to rack their brains about the next product idea.

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