How Mutual Fund NFOs made a splash in year 2021

Here is how the NFO collections panned out monthly on a cumulative basis.

December 27, 2021 8:00 IST | India Infoline News Service
New fund offerings by mutual funds have historically been bull market phenomena. For example, we saw a slew of IT and software fund NFOs launched in the late 1990. This was followed by a string of commodity and infrastructure NFOs during the structural bull market between 2004 and 2008. It is just that equity fund NFOs are easiest to sell in a bull market.

However, the NFO wave of 2021 has been different in the sense that there has been no sectoral or thematic wave seen underlying these NFOs. Despite that, the year 2021 has seen record collections of Rs79,008cr via NFOs, the highest in any full year in history. Here is how the NFO collections panned out monthly on a cumulative basis.

Data Source: AMFI

If you look at the chart, nearly Rs41,000cr out of the total NFO collections of Rs79,008cr happened in the months of July and August. That is hardly surprising considering that 2 of the largest NFOs in the Indian market viz. the SBI MF Balanced Advantage Fund and the ICICI Prudential Flexi Cap Fund hit the NFO market in these months.  Here is the NFO story encapsulated for you for the year 2021.

Who were the big contributors to the NFO wave of 2021

The table captures the top 8 NFOs of 2021 in terms of total collections.
New Fund Offering Amount (Rs. Crore) Month
SBI Balanced Advantage Fund 14,551 Aug-21
ICICI Pru Flexi cap 9,808 Jul-21
NJ Balanced Advantage 5,216 Oct-21
ICICI Prudential Business Cycle Fund 4,185 Jan-21
Kotak Multi Cap Fund 3,510 Sep-21
Nippon Flexicap Fund 3,479 Aug-21
HDFC Banking Fund 3,322 Jul-21
UTI Focused Fund 2,541 Aug-21
Data Source: AMFI

If you look at the top NFO rankers of 2021, the top 8 NFOs accounted for 59% of the total NFO collections in the year. Seven out of the eight names in the top NFOs are established names in the mutual fund segment. However, the surprise package was newly launched NJ Balanced Advantage Fund collection a whopping Rs.5,216 crore through its maiden NFO.

Key trends in NFO collections in 2021

There were 3 broad trends that emerged from the NFO collections in the year 2021. Let us look at these key trends.
  1. Firstly, there was a strong preference for dynamic allocation with greater discretion to the fund manager. For example, if you take the 3 key categories that attracted NFO interest viz. Balanced Advantage Funds, Flexi Cap Funds and Business Cycle Funds, they accounted for nearly 58% of the total NFO collections during the year. Investors are willing to buy a story where fund managers have more leeway to allocate across asset layers based on their judgment. These 3 categories have a higher degree of dynamic allocation built into them.
  2. Investors see value in global diversification as is evident from the response to the recent spate of international FOF offerings. In the top 25 NFOs by collection, there were 4 international FOFs that had collected Rs5,628cr between them. Clearly, investors see value in hedging some of their risks by investing in these NFOs. In a year when the NFO competition has been intense, the global FOFs have made a mark.
  3. Finally, the only segment in the debt space that has attracted NFO attention are the floater funds. Typically, these floater funds invest in floating rate instruments where the  yields move in tandem with the market bond yields. There were 3 floater NFOs that collected close to Rs2,500cr indicating that the better informed bond fund investors are anticipating hardening of bond yields next year with global hawkishness rampant.
Flood of retail money on the side-lines

The surge in interest in mutual fund NFOs indicates that there is a huge amount of retail money in the side-lines looking for attractive opportunities. Some of the retail numbers have been staggering this year. During 2021, the number of registered investors on the BSE crossed 9cr of which 4cr were added just in the last 18 months. CDSL has crossed a record level of 5.30cr demat accounts. The number of mutual fund folios stand at 9.8cr with SIP folios itself accounting for nearly 5cr folios.

All these numbers point to just one reality that there is a flood of money waiting to enter equities, either directly or indirectly. As much as this is gratifying, it also poses a big risk as it could be a typical case an enthusiastic salesman getting the better of an earnest financial advisor. How do investors strike the balance in the midst of these NFOs?

The one way to address this issue is by sticking to your financial plan. Your asset allocation is the guide and don’t distinguish between regular mutual funds and NFOs. Go for an NFO only if there is a genuinely good story and if the particular NFO fits into your asset allocation overall. Otherwise, you can always give it a skip, irrespective of how glib the sales pitch might be and how alluring the product appears.

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