Ever since SEBI (Securities and Exchange Board of India) made it difficult for AMCs (asset management companies) to launch Open-Ended mutual funds by capping the sales and marketing expenses that can be charged to the fund and ensuring that the new fund is truly “new”, Close-Ended funds have become the order of the day. And even more cumbersome has been this somewhat annoying trend of launching series of the same (Close-Ended) funds.
Since the window for investing in Close-Ended funds is open only for a limited period, investors who have missed the opportunity to invest in them would like another chance at some point in time. At least that is what some AMCs seem to believe. This has given rise to the phenomenon of launching a series of fund offerings under a common ‘brand’. So we have seen ICICIPru Fusion Fund (a 3-Yr close-ended, predominantly mid cap fund) launch two series over the last two years. Both the offerings are exactly the same; the second offering is mainly for those who missed the first one or for existing investors who want to invest further. Also, it is worth noting that the fund house already has an open-ended mid cap fund, so investors who missed the bus have an option over there as well.
Birla Sun Life Mutual Fund is another fund house that has recently launched a series i.e. the Birla Sun Life Long Term Advantage Fund – Series 1. It would be fair to assume that over time, more series under the same brand could be launched.
One point that AMCs with serial offerings probably haven’t considered (or have chosen to consider at a later date) is that when these serial funds turn open-ended (yes, most of these close-ended offerings will turn open-ended on expiry of the stipulated tenure), they will in effect be multiple copies of the same investment style. So 6 years from now, we are likely to see at least two ICICIPru Fusion Funds (or two Birla Sun Life Long Term Advantage Funds 4 years from now) that will pursue the same investment style leaving investors at that point all confused about which fund to choose and which one to ignore.
One option that these AMCs have is to merge these serial funds into a single fund, which again is a little roundabout. Why launch so many series when eventually they will all be merged into one fund? Isn’t it much simpler to promote the existing open-ended fund and build that brand? Why does it have to be an NFO?
While serial funds make imminent sense on the debt side, especially while launching fixed maturity products since it allows the fund manager to lock the yield (which is dynamic), the rationale behind close-ended serial offerings on the equity side is yet to be fully comprehended. Isn’t it much simpler for all concerned (especially the investor) to have a single, open-ended offering that allows all investors to invest in it all the time?
Of course, the close-ended funds allow the fund manager to take long-term investment calls (which is what equity investing should be all about) without worrying about redemptions. However, this can be replicated easily in an open-ended fund as well by imposing a stiff exit loads on premature redemptions. Many AMCs have already implemented this, with one AMC in particular slapping an exit load on its equity fund on redemptions made upto 24 months from the date of investment. Not surprisingly, these AMCs witness a degree of slowdown in their redemptions, which gives the fund manager just the space he needs to make long-term investments.
Serial NFOs serve little purpose other than drawing investors on the ‘NFO’ plank (read the cheaper, Rs 10 NAV). They also serve to pamper unscrupulous mutual fund distributors with obscene commission rates that can go as high 6% of the investment amount (i.e. for every Rs 100 that you invest, your agent will pocket Rs 6). Put everything together, and one has a fairly good idea about why serial NFOs will keep getting launched.
Meanwhile, avoid serial NFOs on the equity side and instead focus on the well-established funds with a proven track record over the long term. Once the NFOs have established their credentials and have made a case for investing in them, one can take a revised view and consider adding them to their portfolios.