Investors rush into NFOs as stock markets hit a high

BL Research Bureau

‘Buy Low, Sell High’, a cardinal principle in investing, is widely preached but seldom practised. The rush with which mutual fund houses are coming up with new fund offers (NFOs) even as the market is touching new peaks, and the gusto with which investors are buying into them, is a case in point.

With the bellwether Sensex and Nifty up 75 per cent since their March lows, as many as 23 equity NFOs have been launched so far this year and more may come.

Playing on investor psyche

Ironically, NFOs are garnering good inflows at a time when existing equity funds have been seeing net outflows every month since July.

Explains Shyam Sekhar, Chief Ideator and founder, ithought Financial Consulting LLP, “People are unhappy with their existing mutual fund holdings as past performance looks unattractive today. New themes like ESG (Environmental, Social, and Governance) funds are being marketed and for those who have redeemed their existing holdings, a new fund is tempting. With an NFO, the distributor also gets an opportunity to go to the same person with a new idea”.

The surge in DIY (Do-it-Yourself) investing is also driving this trend, according to Shyam Sekhar. “Today, you have a lot of DIY and direct (plan) investors who actually don’t know the market. They mistake technological familiarity (that is, using apps, etc.) with knowledge of investing. And their confidence is increasing geometrically with the rally, even as market veterans turn cautious.”

Cashing in globally

Global markets, too, have been on a purple patch this year and investors are being tempted towards international diversification too.

Principal Large Cap, DSP Value, Axis Special Situations arerecent equity NFOs that invest in global markets for a portion of their portfolio.

Rajeev Thakkar, CIO and Director, PPFAS Mutual Fund, feels that having a blend of domestic and global stocks results in lower portfolio volatility. “It helps take advantage of innovative and disruptive companies such as Google, Microsoft or Pfizer that don’t have equivalents in India.

The rupee has been depreciating against the dollar at an average of 3-5 per cent each year. This adds to the returns on overseas stocks,” he reasons.

Amidst the euphoria, a good sign is that low-cost passive investing has taken off in equity and debt segments. Until October this year, ETF NFOs (barring CPSE/Bharat Bond ETF) have garnered over ₹1,700 core. In 2019, it was only ₹400-odd crore and much lower in prior years.

But Anil Ghelani, Head of Passive Investments, DSP Investment Managers, says, “NFOs in ETFs are done just for seeding and hence huge collections are not the norm. A robust ecosystem for buying and selling ETFs once they list on the exchange, is what matters in popularising them,” he adds.

Thankfully, NFOs of close-ended equity fund, which formed a chunk of the collections in the bull markets of 2014 and 2017, have seen a quiet exit, after SEBI’s clampdown on expense ratios and the practice of fund houses front-ending high commissions to distributors to sell such products.

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