Mutual fund NFOs in FY24, see a shift to themes and allocations

29 Apr 2024 , 12:16 PM

In fact, the last time when the NFO collections had crossed the ₹1 Trillion mark was in FY22. Both FY23 and FY24 saw rather subdued collections via new fund offerings (NFOs). Now these NFOs are the equivalent of the IPOs we have in the equity market. The only difference is that, unlike the IPOs, these NFOs don’t have a business model of their own but invest in stocks, bonds, and other securities. Unlike the IPO, where the price appreciates due to tangible and intangible factors, the NAV of the fund post the NFO will only move in tandem with the value of the underlying portfolio, adjusted for the total expense ratio. However, the NFOs are an important means for AMCs to launch new funds to fill gaps and also to expand their customer base. Historically, mutual funds have been known to add a lot of fresh retail folios during these NFO periods.

WHAT WE READ FROM THE NFO DATA FOR FY24

In FY24, the Indian mutual funds collected a total of ₹66,364 Crore across a total 185 new fund offerings (NFOs) during the year. That is marginally higher than the NFO flows in FY23 and substantially lower than the NFO collections in FY22. Now, that is a sort of an anomaly. Normally, when the markets are at their highs, it is considered to be the right time to make hay while the sun shines. That is when most of the fund houses capitalize on the most happening mutual fund themes and leverage their AUMs through fresh collections via NFOs. However, that does not appear to be the case in FY24, although the Nifty and the Sensex are trading very close to lifetime highs.

There are several reasons for this. Today, each fund house can only have one fund in any of the key categories like large caps, mid-caps, multi-cap, small cap etc. The only exceptions are sectoral funds and index funds / index ETFs where multiple funds with minor distinction are possible. Hence, the NFOs have gradually gravitated towards those themes which do not have an upper limit. The other NFOs come from the new funds that have entered the market. Thirdly, for any NFO, the big driving thrust comes from the large AMCs with their massive bancassurance distribution network. However, most of the large AMCs find it more productive to focus on expanding their SIP franchise rather than bother about expanding their family of funds through NFOs. All these factors have subdued the NFO market.

Let us now turn to a quick recap of NFO flows in fiscal years FY23 and FY24, to understand the colour and direction of NFO flows in these two fiscal years.

RECAP – NFO STORY IN FISCAL YEAR FY23

FY23 was specifically disappointing as it came just after the bumper NFO collections in FY22. To an extent one can say that the FY23 numbers for the period from April 2022 to March 2023 are not exactly comparable. That is because in 2 out of the 12 months i.e. May 2022 and June 2022, there were no NFOs. That is because SEBI had insisted that no NFOs would be permitted till the AMCs put in place the new system which will allow the funds to flow directly from the customer to the AMC, without residing at the broker / distributor end. Since most of the fund houses had not put this system in place, SEBI banned fresh NFOs effective from May 2022 and only allowed them from July 2022 after the AMCs assured SEBI that the methodology and the process flow was in place. Hence FY23 is more of a 9-month story since the approvals only came around middle of July.

Fiscal Year FY23	No. of NFOs	Generic Equity MF	Thematic Funds	Flexi Caps	Index Funds	Index ETFs	Close End FTPs	Hybrid Funds	Income Funds	Monthly NFO Flow
Apr-22	3	0	3,130	0	91	19	0	0	0	3,240
May-22	0	0	0	0	0	0	0	0	0	0
Jun-22	0	0	0	0	0	0	0	0	0	0
Jul-22	9	0	0	0	5	11	1,430	0	0	1,446
Aug-22	37	733	367	1,962	203	79	2,293	756	1,592	7,985
Sep-22	21	333	3,823	1,680	487	130	1,117	804	0	8,374
Oct-22	31	15	2,609	426	1,750	11	598	0	30	5,439
Nov-22	26	90	2,336	0	980	90	3,703	0	0	7,199
Dec-22	36	1,586	0	410	571	2,798	1,532	1,235	354	8,486
Jan-23	18	0	0	1,204	420	27	851	1,572	348	4,422
Feb-23	27	0	2,540	2,508	863	30	954	292	0	7,187
Mar-23	45	6	3,835	0	634	181	3,878	0	30	8,564
FY23 Total	253	2,763	18,640	8,190	6,004	3,376	16,356	4,659	2,354	62,342

Data Source: AMFI (₹ in crore, except number of NFOs)

The table above captures the picture of NFOs in FY23 presented month-wise and also category wise. Despite the 2 months ban on NFOs to prevent brokers and distributors from syndicating NFO money from the customers, it must be said that the NFO flows did pick up in the last 8 months of the fiscal year. In fact, 92.5% of the NFO flows in FY23 came in the last 8 months of FY23 with just 7.5% of the NFO flows coming between April 2022 and July 2022. From that perspective, it must be said that the NFO show in FY23 was not exactly bad.

For the fiscal year FY23, there were a total of 253 mutual fund NFOs which collected ₹62,342 Crore between them. It was thematic funds that dominated the collections in FY23 raising ₹18,640 Crore. This was across all thematic funds, sectoral funds, and focused funds. This was the top contributor to the NFO story in FY23. The second ranked category was a surprise as it was the closed ended FTPs (fixed term plans) which attracted a lot of interest as bond investors looked to lock themselves into longer duration debt with a view to gain from fall in interest rates. Among the other categories, the combination of flexi caps and multi-caps saw total NFO flows of ₹8,190 Crore in FY23. After a stellar performance in FY22, index funds and index ETFs were relatively subdued in FY23.

Hybrid funds did see some limited flow of ₹4,659 Crore via NFOs, but in the absence of BAFs leading the show (like in FY22) there was not much that other categories of funds could add up to. The generic equity funds comprising of large cap funds, large & mid-cap funds, Mid-cap funds, small cap funds, and ELSS funds hardly saw any NFO interest with just about ₹2,760 Crore worth of NFOs. However, it must be remembered that these generic equity funds were seeing substantial flows coming in via systematic investment plans (SIPs) and hence the NFO flows were not really too material.

CIRCA NOW – NFO STORY FOR FISCAL YEAR FY24

If FY23 was disappointing in terms of NFO flows, it must be said that FY24 was also a tepid year for NFO flows. Unlike FY23, there was freeze of 2 months on NFOs, so it was a full year of NFO flows, with stock markets robust, Nifty giving 30% returns and yet the NFO flows were just about 6% higher than in FY23. The one big difference was the change in the tax methodology for pure debt funds. Effective April 2023, debt funds which had less than 35% exposure to equity, did not get any indexation benefits on long term gains. Hence, the gains would still be treated as income and taxed at the peak rate of tax. This took away the charm of debt funds, especially the fixed term plans (FTPs) which were typically floated around the end of one financial year and redeemed at the start of the fourth financial to get the benefits of double indexation. That was not applicable any longer, which explains the sharp fall in the FTP NFO flows in the recent concluded FY24.

Fiscal Year FY24	No. of NFOs	Generic Equity MF	Thematic Funds	Flexi Caps	Index Funds	Index ETFs	Close End FTPs	Hybrid Funds	Income Funds	Monthly NFO Flow
Apr-23	9	0	1,612	0	34	10	0	101	71	1,828
May-23	5	0	174	0	142	0	103	64	0	483
Jun-23	11	101	2,717	220	63	15	0	112	0	3,228
Jul-23	17	0	1,540	1,471	176	122	0	0	3,414	6,723
Aug-23	15	0	2,556	2,446	31	63	188	2,247	0	7,531
Sep-23	16	0	1,629	874	6	53	0	5,233	0	7,795
Oct-23	14	1,103	918	975	71	346	0	199	26	3,638
Nov-23	14	41	1,342	551	96	10	447	96	0	2,583
Dec-23	21	2,062	4,259	0	167	64	2,060	1,260	0	9,872
Jan-24	20	0	284	683	976	243	384	4,247	0	6,817
Feb-24	22	1,514	7,178	0	696	582	251	1,499	0	11,720
Mar-24	21	0	3,074	0	178	70	319	396	109	4,146
FY24 Total	185	4,821	27,283	7,220	2,636	1,578	3,752	15,454	3,620	66,364

Data Source: AMFI (₹ in crore, except number of NFOs)

Like calendar FY23, even the NFO collections in FY24 were sharply lower than in FY22. Ideally, with the RBI giving enough indications that rates had peaked out, the expectation was that debt funds would attract a lot of NFOs. However, the changed capital gains calculation methodology took away most of the charm of these debt funds, which explains why there was a huge shift towards NFOs by equity funds and hybrid funds, which leveraged the equity story by allocating more than 65% to equities to get the equity classification.

For FY24, more than 40% of the fiscal year flows were from thematic funds at ₹27,283 Crore. This was across thematic funds, sectoral funds, focused funds, and dividend yield funds. That is not surprising as investors sought alpha through categories like sector funds, thematic funds, and others where there were focused bets. In most cases, these thematic funds also delivered the goods. Large cap fund investors veered towards low-cost passive funds while the alpha seekers gravitated towards thematic funds of different hues. NFOs of mid-cap and small cap funds showed some traction in the early stages, but the story changed after SEBI came in and warned mutual funds about the rising front in mid-cap and small cap stocks. That kind of spoilt the party for generic equity fund NFOs in FY24.

The second highest contributor of NFOs in calendar 2023 were the hybrid funds, which saw NFO collections to the tune of ₹15,454 Crore. Not just in NFOs, even in secondary flows, investors were willing to experiment with multiple asset class amalgams like BAFs, multi asset allocation funds, equity savings funds etc. More than BAFs, it was the multi-asset allocation funds that were the toast of the NFOs in FY24. Clearly, there was a much greater focus on asset allocation in FY24, and investors reconciled themselves to the idea of allowing the mutual funds to help them with asset allocation via off-the-shelf products. The only other key contributor was the Flexi Cap / Multi-cap funds which saw a lot of interest in this mixed version of equity assets. In fact, the NFO preference was for multi-cap funds where the allocation was more rule-based rather than purely discretionary.

HOW THE FY24 NFO STORY COMPARED WITH FY23?

In FY24, there were some distinct shifts visible. Firstly, the preference for debt fund and FTPs dwindled sharply due to the change in the tax structure, which made pure debt funds a less favoured category from a tax perspective. Investors were willing to take risk of alpha on a small part of their allocation. That explains the surge in interest in sector funds, thematic funds, dividend yield funds and focused funds. Finally, the biggest takeaway from the NFO comparison of FY24 versus FY23 was the coming of age of hybrid funds. They are not only dominating the monthly flows but also the NFOs. Investors in mutual funds are starting to see merit in rule-based asset allocation, since it is asset allocation that explains over 80% of the swing in returns. The one thing missing in the last couple of years is the big shift towards passive investing. Active investing and allocation appear to be the name of the game!