With the stock markets on a high, Asset Management Companies (AMCs) have been rolling out a flurry of New Fund Offers (NFOs). A majority of these NFOs are thematic funds which invest in sectors or companies that fit into a narrowly defined theme. With some NFOs receiving large subscriptions, AMCs have been slow to deploy the money. Some AMCs have also parked their NFO collections in money markets for lengthy periods, believing markets to be expensive and waiting for better times to invest.

This seems to have attracted the ire of Securities Exchange Board of India (SEBI). The regulator has floated a consultation paper seeking to impose a 30-day limit on the deployment of NFO proceeds by AMCs. AMCs may, if unable to meet this deadline, seek another 30-day extension from their investment committee in exceptional circumstances. In case an AMC does not adhere to this timeline, it will not be allowed to launch any other schemes.

Taking away the fund managers’ discretion to invest NFO proceeds at the most appropriate time or build up higher debt/cash equivalents when stocks are over-priced, may actively undermine fund returns and work against the interests of investors. However, SEBI’s motives in proposing these rules are unexceptionable. One, it wants to disincentivise AMCs from using NFOs as the primary route to garner new money. When choosing funds, retail investors ideally ought to go with established funds with a good long-term track record. But they seem to wrongly believe that new funds at ₹10 per unit are a bargain compared to older funds with high Net Asset Values (NAVs). Forcing fund managers to deploy NFO money in highly valued stocks can sour the return experience for such investors. Two, SEBI probably wants to discourage the proliferation of thematic funds, which are riskier than diversified funds with broad mandates. Recent months have seen a series of thematic NFOs focused on defence, manufacturing, realty, electric vehicles – all themes that have delivered blockbuster gains in the recent past. Some of these themes are so narrow that AMCs have struggled to find investment-worthy stocks after collecting massive sums. SEBI seems to be hoping that its proposal of time limit on investment can force a rethink on thematic NFOs.

However, both the industry and investors seem unlikely to quit the thematic fund habit. The mutual fund industry has historically made hay while the sun shines, by launching NFOs that play on the flavour of the season. Investors too have preferred them over vanilla funds. If technology funds were all the rage in 1999-2000, it was infrastructure funds in 2007-08. Past cycles have shown that investors can lose their shirts betting on hot themes at peak valuations. Therefore, if AMCs after collecting money under thematic NFOs delay deployment biding their time, this is a good thing. SEBI should allow this. After all, in the open-end structure, investors are free to exit funds at any time.

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