Mutual fund NFOs robust in 2022, despite the 2-month ban

20 Feb 2023 , 09:32 AM

In fact the 2022 NFO inflows stood at Rs62,187 crore, which is a full 37.6% lower compared to the inflows of Rs99,704 crore in calendar 2021. Of course, NFOs in 2022 were more than in 2020, but that would be like comparing apples and oranges since year 2020 was an exceptionally weak year due to the lag effect of the COVID pandemic. The table below gives the break up of mutual fund NFOs in calendar 2022.

Calendar Year 2022	Thematic Funds	Flexi/Multi Cap Funds	Index Funds	Other ETFs and FOF	Close End FTPs	Dynamic Funds (BAF)	Income Funds	Total (Rs crore)
Jan-22	–	–	2,490	228	227		285	3,230
Feb-22	640	1,276	1,062	332	203		–	3,513
Mar-22	–	8,170	3,596	121	1,364		24	13,275
Apr-22	3,130		91	19				3,240
May-22	–	–	–	–	–		–	–
Jun-22	–	–	–	–	–		–	–
Jul-22			5	11	1,430			1,446
Aug-22	1,100	1,962	203	79	2,293	746	1,602	7,985
Sep-22	4,156	1,680	487	130	1,117	745	59	8,374
Oct-22	2,624	426	1,750	11	598		30	5,439
Nov-22	2,426		980	90	3,703			7,199
Dec-22	1,586	410	571	2,798	1,532		1,589	8,486
Category Total	15,662	13,924	11,235	3,819	12,467	1,491	3,589	62,187

Data Source: AMFI

Before we get into the nuances of the table above, let us first address the issue of why there were two blank months in terms of NFO collections viz. May 2022 and June 2022.

SEBI puts a halt on mutual fund NFOs in April 2022

In the last few years, SEBI has been trying to regulate the movement of funds from investors to principles. The attempt here has been to ensure that the flow of funds from the investor to the AMC was direct and seamless. However, for a long time, mutual fund investors were used to giving power of attorney to the brokers to invest on their behalf. In such cases, the funds would flow from the investor to the broker and later to the AMC. Considering the risks of brokers and advisors handling client funds, SEBI has given clear instructions that no mutual fund distributor, online platform, broker or investor advisor pools accounts and then transfers it to the AMC. Since, this had not been implemented, SEBI imposed a ban on new NFOs, in April till this system of pooling was effectively curtailed.

Fund houses could launch new schemes only after complying with the SEBI circular on non-pooling of client funds and giving an undertaking to the regulator of such implementation. However, when the implementation was not done even after the second deadline of 15th March 2022, SEBI imposed a ban on fresh NFOs. On repeated requests from AMFI, SEBI allowed time till July 01st 2022 to ensure compliance, but insisted that NFOs would be banned till then. This led to a virtual drought of NFOs in May and June of 2022.

Broad takeaways on NFO data in 2022

While the value of NFOs in the year 2022 may have been lower, the actual number of NFOs were higher in the year 2022, indicating much smaller size of such NFOs. For instance, a total of 228 new NFO schemes were floated in the year 2022, compared to just 140 NFO schemes launched in 2021. There was also a shift in the category. In 2021, the focus was largely on balanced advantage funds (BAFs) led by the record NFO collections of the SBI BAF in 2021. However, the BAFs were marginal in year 2022 and the focus was largely on passive funds, fixed income categories, closed ended FTPs and multi-cap and sectoral equity funds.

In the year 2022, out of the total of 228 mutual fund NFOs, there were a total of 179 open-end funds and 49 closed-end funds (largely FTPs). The FTPs or fixed term plans are closed ended term plans where yields are predictable since the constituent assets have a maturity profile matching that of the FTP. Also, FTPs typically have a tenure of a few days over 3 years, which makes them eligible for double indexation. Combined with the higher yields on debt instruments, amidst RBI hawkishness, FTP was a preferred NFO in year 2022.

While the 2 month ban on NFOs was one reason for the lower quantum of NFO collections in 2022 compared to 2021, there were other factors too. For instance, the market had peaked in October 2021 and that had coincided with the massive rally in digital stocks and a surge in digital IPOs. However, post late 2021, there was a heavy surge of FPI selling and that impaired sentiments in the market. That also had an impact on the NFO collections during the year 2022. Among key drivers, 84 NFOs of index funds collected Rs11,235 crore while 49 closed ended fixed-term plans mobilised Rs12,467 crore in the year 2022.

What we read from the NFO data for 2022

Here are some of the key takeaways from the NFO flows data from the just concluded calendar year 2022.

1. March 2022 was the only month to see 5-figure collections in terms of NFOs in 2022. Other major months in terms of NFO mobilization flows were August, September, November and December 2022.

    

2. Thematic equity funds collected a total of Rs15,662 crore in the year. However, it must be noted that we have also included large cap, mid cap and small cap funds also in this segment; apart from sectoral and thematic funds. The NFO flows were largely dominated in the year 2022 by sectoral and thematic funds; largely because there are not restrictions from SEBI on the number of schemes that an AMC can launch.

    

3. The category of flexi-cap funds and multi-cap funds saw NFO mobilization of Rs13,924 crore in the year 2022. This is largely because, this has been a category missing in many AMC portfolio offerings and offered a good opportunity for the AMCs to launch new NFO products around such themes. However, the enthusiasm was more visible in the first half of the year.

    

4. Index funds and index ETFs continued to dominate a bulk of the NFO flows in 2022. Here again there are two reasons. Firstly, index funds give a good option to offer passive products on the equity and the debt side. Secondly, the index funds and ETFs are also not tied down by restrictions on the number of funds that an AMC can have. During the year 2022, index funds (equity and debt) mobilized Rs11,235 crore while ETFs and FOFs (fund of funds) also mobilized Rs3,819 crore in the year.

    

5. Finally, one of the most interesting stories of the year 2022 was the Rs12,467 crore of mobilization through the closed ended fixed term plans (FTPs). As explained earlier, the higher yields on bonds and the attractiveness of locking in high yields for over 3 years appealed to the investors. Not to forget, the dual indexation benefit on these FTP funds also boost the post-tax yields on these funds.

To sum it up, the mutual fund NFO mobilizations in 2022 were certainly lower than in 2021. However, the market sentiments were vastly different and also the SEBI ban on NFOs led to loss of momentum in NFOs. However, the emergence of new categories in NFOs in 2022 is a good sign for the year 2023.