It is a well known fact that investment in mutual funds is yet to emerge as a preferred investment avenue for retail investors, though the mutual fund industry in the country has come a long way from the first sale of this product by UTI in 1964. It is also a known fact that the number of mutual fund investor accounts hit a new low at 39.5 million in March 2014 as compared to 48 million in 2009, before inching to 42.8 million in June 2015.
Also, lately there has been a marked slowdown in New Fund Offer (NFO) issuance, which stood at 340 schemes during April and September, 2015. The figures were 1,059 for 2014-15 and 1,023 for 2013-14.
So, what has contributed to this slackening in NFO issuance and how should the retail investor react to this development? Let us analyse.
The main reason for dampened interest in NFOs is Sebi's active intervention. In a recent order, the regulator has made it clear that there should be a merger of “me-too” mutual fund schemes and denied approvals to NFO issuances that did not comply with this norm. In other words, the Sebi wanted a differentiation in investment features of a prospective new mutual fund and this pulled back certain issuances.
The slow pace of the NFOs could also be attributed to the fact that certain asset management companies have nearly completed their product suite. Sebi's directive that the details and the number of funds managed by each fund manager should be disclosed also added to the circumspection before each mutual fund launch.
is this Trend Good or Bad for Investors?
Counter-intuitively, the slowdown in NFOs is not a big loss for investors. Ideally, if an investor wants to choose between an NFO and existing fund, where the parameters are same, it is better to opt for the latter as the investor will be able to know the performance of the fund at different stages in the market, investment style and portfolio.
Moreover, when one has decided to buy mutual funds through the NFO route, the high marketing expenses will be thrust upon the investor, while for the existing funds these expenses would be much lower. So, the recent slowdown in NFO issuance is not at all a bad news for investors at all.
Safety Path for Investors?
When it comes to investments in mutual funds, Sebi recently went the extra mile to protect the interest of the investors. In order to make the mutual fund industry more transparent, the regulator mandated more disclosures whereby investors can get a clear picture on where they are parking money.
To prevent mis-selling, there are instructions to change the commission structure. Moreover, easy-to-understand riskometer graphics had been made mandatory to display the risk involved in a fund such as low, moderately low, moderate, moderately high, and high. These will help investors to gauge the viability of a mutual fund.
How to plan MF Investments
Before taking a decision to invest, one should chalk out the needs and objectives of pumping money into a mutual fund scheme. An investor should have a clear idea of the quantum of risk that could be taken and the cash flow requirements for a specific period.
Once the basic needs have been identified, the next step is to choose the right mutual fund scheme. For this, a number of parameters should be taken into consideration. If it is an existing fund, try to find out the past performance of the funds such as the returns and stability of the scheme in the face of vagaries in the market. Also, look at the degree of transparency in the scheme.
While choosing the scheme, make sure that the right mix is chosen. If you invest in just one scheme, it may not address all your needs, so it is better to choose a combination of schemes that can specifically achieve your goals.
If the mutual fund is an open-ended scheme, it offers liquidity as the investor could get back the money promptly. In case of close-ended schemes, they could be traded on stock exchanges. Mutual funds also help in mitigating risks to a great extent by spreading the investor’s money in diversified assets.
Conclusion
Investors don't have to press the panic button right now if lesser and lesser number of NFOs are being issued. They have the option of choosing an existing fund scheme, which could actually be a better choice. Before investing into the mutual fund, you need to make sure that your investment needs are clearly outlined.
