Why had SEBI put a ban on mutual fund NFOs and can we expect these NFOs to commence from July 2022?
Answer
Answer
SEBI has had a problem with the concept of pool accounts since the Karvy fiasco first came to light in 2019. Pool accounts are where mutual fund investments are routed through the broker pool accounts. Post the Karvy fiasco, the regulatory had repeatedly asked for this pool account system to be scrapped and had asked mutual funds put an alternate system in place. When the March deadline was not met, the SEBI imposed a freeze on fresh NFOs till the time the AMCs could demonstrate to AMFI that non-pool systems were in place.
Clearly, the mutual funds appear to have lost out in the interim period and they are aggressively lining up new issues to launched once the ban is lifted. Some of the recent NFO filings were the Sundaram Flexicap Fund, Baroda BNP Paribas Floater Fund, LIC MF Multi Cap fund, Franklin Templeton Balanced Advantage Fund (BAF) and the Axis Duration Fund. Even AMCs are planning major forays and such AMCs include Navi MF, White Oak MF, Samco MF and NJ MF. Let me now quickly recap the background to the pool account story.
Under the pool account system, the mutual fund distributor, online aggregator, stockbroker or investment advisor was permitted to pool money of investors in a bank account. Such monies could then be transferred on a consolidated basis to the AMC with appropriate unit allocations at a client level. Now that system is not valid any longer and clients have to directly buy in their own accounts without using the pool facility. The idea is to prevent any scope for frauds, misuse of money, illegal use of money float etc.
NFOs are important for NFOs for a number of reasons. In FY22, mutual funds saw record collections of Rs96,00 crore. Fund launches were predominantly in index funds or exchange traded funds (ETFs) or funds with a theme or sector bias. Multi-cap funds and BAFs were the attractive themes. Index funds and ETF NFOs are popular because the one scheme per category rule (stipulated by SEBI) does not apply to index funds and ETFs. Just a word of caution that NFOs are not easy money and one should not get lured by the Rs10 issue.