Some of the recent events and product launches in the mutual fund industry have us stumped. They have evoked contradictory sentiments of concern and humour. While we have vented our concern in several articles over the months, we think its time to share our not-so-serious views on these developments.
Quite frankly, the mutual fund is turning into a spectacle that calls to mind a popular song of the 80s:
Welcome to the jungle
We've got fun 'n' games
We got everything you want
Honey, we know the names
We are the people that can find
Whatever you may need
If you got the money, honey
We got your disease
(Welcome to the Jungle by Guns N Roses from the album Appetite for Destruction)
Increasingly the mutual fund industry is assuming the traits of a jungle. What else can you say when you have a T.I.G.E.R. (The Infrastructure Growth and Economic Reforms Fund by DSP ML Mutual Fund) followed by a L.I.O.N. (Large Cap and Intermediary Opportunities NFO by ING Vysya Fund). It's a strange kind of a jungle because it has a BANK (Bees by Benchmark Mutual Fund) with an A.T.M. (Against the Market). There are H.I.FI. (Housing, Infrastructure, Finance Fund by JM Mutual Fund) mutual funds that are meant to make you S.M.I.L.E. (Small Medium Indian Leading Equities Fund by Sundaram Mutual Fund) but only end up make you frown with confusion!
We got everything you want
Honey, we know the names
True to the song, you have Asset Management Companies (AMCs) with funds that have some very fancy names catering to a range of diverse investment tastes. The problem with fancy names is that they only have a shock-value kind of an effect. It does not tell the investor a thing about the fund and what it seeks to achieve for the investor (and if it is meant to, hardly anyone can understand it!). The investor is confused because he does not get any inkling about the fund's investment proposition from the fancy name. In most cases, the NFOs are almost similar to existing schemes offered by the same AMC.
Once the dust on the NFO settles down and he receives his fat NFO commission cheque, the distributor of that fund is equally in the dark about what the fancy fund has on offer. Apart from the names, even the investment mandate is often so complicated that it is difficult to appreciate the investment intricacies involved. If the NFO analysis reports on Personalfn are getting longer and longer, you know who is to blame.
Not surprisingly at Personalfn we find that many a times even the sales team at the AMC is not clear what the real mandate is or how it is anydifferent from the mandate of existing schemes. Well, we know the answer to increase what is called the AUM assets under management.
If we were to hazard a guess what is on the horizon from the opportunistic AMCs, very soon there will be a Rural Opportunities Fund. If you see one out there, remember you read it here!
While we appreciate the fact that the investor is king who must have a large number of schemes to choose from, we believe some AMCs may have gone a little overboard with their launches. At a time when some large AMCs, don't even have a regular balanced fund offering (in our view a core investment in a mutual fund portfolio), it is surprising to find such AMCs launching thematic/sectoral funds NFOs instead. In other words, they still don't have a complete offering from an AMC perspective. Launch any NFO so long as its equity; that is the principle a lot of AMCs seem to be working on right now.
With the fancy names and offbeat investment mandates, we can't think of any solid reason why AMCs are falling over themselves to launch NFOs. Of course, when you consider that there is a guideline pending with AMFI (the mutual fund industry association body) to make AMCs write off NFO expenses in the very first year of operation (as opposed to amortising it over 6 years), then it does partly explain the rationale behind some of these NFOs.
Also consider that a booming stock market is a good enough reason to make AMCs drool at the opportunity of beefing up their equity assets as it earns them a higher money management fee. Among other factors, an AMC's profitability is directly linked to the quantum of its equity assets. This could also be a good opportunity for fund house CEOs to prove who can mobilise the highest monies from an NFO.
Regardless of why there is a mad rush to launch NFOs, as a mutual fund research outfit, we can only empathise with the retail investor who sees a new NFO being advertised every week on the hoarding across the office. He wonders like we do, what the latest NFO has on offer that the half a dozen NFOs before it, did not. And it will not be surprising if after witnessing the barrage of NFOs, he is left with a feeling that coincides with the song that we highlighted earlier in the article:
If you got the money, honey
We got your disease
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