Mutual fund NFOs lower in FY23 due to 2 month NFO freeze

19 Apr 2023 , 10:05 AM

Mutual fund collections through new fund offerings (NFOs) for the financial year FY23 stood at Rs62,342 crore. That is a full 42.2% lower than the NFO collections of Rs107,896 reported in FY22. In FY22, several NFO themes like multi-cap funds, balanced advantage funds (BAF) and flexi-cap funds had witnessed record collections.

In comparison, the NFO collections in FY23 were also impacted by the 2 month total freeze on NFOs imposed by SEBI. We will come back to this point later. However, it must be added that volatile markets, tepid FPI flows and global headwinds also made mutual fund investors wary of NFOs. The table below gives the break-up of mutual fund NFOs in fiscal year FY23.

Financial Year  2022-23	Thematic Funds	Flexi/Multi Cap Funds	Index Funds	Other ETFs and FOF	Close End FTPs	Dynamic Funds (BAF)	Income Funds	Total (Rs crore)
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
Jan-23		1,204	420	27	851	1,572	348	4,422
Feb-23	2,540	2,508	863	30	954	292	–	7,187
Mar-23	3,841		634	181	3,878		30	8,564
Category Total	21,403	8,190	6,004	3,376	16,356	3,355	3,658	62,342

Data Source: AMFI

Before we get into the specifics of category-wise flows, here is a quick look at the 2-month freeze on NFOs imposed by SEBI and how it did impact the NFO collections in FY23.

How the SEBI NFO ban impacted NFO flows in FY23

In the last few years, SEBI has been consistently trying to regulate movement of funds from investors to principals. SEBI has not been comfortable with the idea of an agent investing in a mutual fund on behalf of the client with controlling bank transactions. SEBI clearly wanted 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 had been attuned to giving power of attorney to the brokers to invest on their behalf. This was something that suited the clients, brokers, and the AMCs, so the practice had continued almost unabated.

Here is how the modus operandi worked 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 already issued clear instructions that no mutual fund distributor, online platform, broker, or investment advisor should pool such accounts and then transfer to the AMC. Despite repeated reminders, when the new rules were not implemented, SEBI put a freeze on new NFOs, in April till checks and balances were in place.

The condition was that the fund houses could launch new schemes only after complying with the SEBI circular on non-pooling of client funds. They also had to furnish an undertaking to the regulator that the systems were in place for such an implementation. When mutual fund did not meet even the second deadline of 15th March 2022, SEBI imposed a ban on fresh NFOs for the months of May and June 2022. This was a key reason in the sharply lower NFO collections in FY23. 

Key takeaways from the NFO data for FY23

If we consider the overall picture of NFO flows in FY23, here are some of the major takeaways from an investment point of view.

1. In FY23, there was not a single month with more than Rs10,000 crore of collections. There were 3 months with NFO collections of over Rs8,000 crore. However, the 2 months of virtual drought of NFOs in May 2022 and June 2022 actually put the FY23 collections way behind the total NFO collections in the previous fiscal year, FY22.

    

2. Thematic equity funds ruled the roost in FY23 and collected a total of Rs21,403 crore in the financial year FY23. However, it must be noted that we have also included mid cap and small cap funds in this segment; apart from sectoral and thematic funds. The NFO flows were largely dominated in the financial year FY23 by sectoral and thematic funds. That is no restrictions from SEBI on the number of thematic schemes that an AMC can launch. The March 2023 data also included the record collections from the SBI Dividend Yield Fund NFO, with SBI now accounting for 25% of the category AUM.

    

3. The category of flexi-cap funds and multi-cap funds saw NFO mobilization of Rs8,190 crore in fiscal year FY23. This is sharply lower than the previous year since investors have generally been less enthusiastic about fund manager discretion in allocation. Also, most of the fund houses that had a gap in multi-cap and flexi-cap fund have already launched these funds in FY22 itself. Multi-cap and flexi cap funds are where the fund manager has the leeway to spread investments of the fund across large cap, mid-cap, and small cap funds. However, it is only in flexi-cap that they have discretion while in multi-cap, the mix of various capitalization categories is clearly defined by SEBI.

    

4. Index funds and index ETFs continued to dominate a bulk of the NFO flows at Rs9,380 crore in FY23. Here again there are two reasons for the sustained enthusiasm and that is also evident in the way the AUM of these funds have consistently grown. Firstly, index funds give a good option to offer passive products on the equity and the debt side. In fact, the trend has been that investors in active large cap equity and in active debt funds appear to be gravitating towards passive index funds. Secondly, the index funds and ETFs are also not tied down by restrictions on the number of funds that an AMC can have at any point of time. AMCs can have a number of index funds across different indices and that gives a lot of leeway to the fund houses. During the financial year FY23, index funds (equity and debt) mobilized Rs6,004 crore while ETFs and FOFs (fund of funds) also mobilized Rs3,376 crore. Interestingly, the rally in gold has not really translated into gold ETF NFOs or even additional flows into gold funds.

    

5. Finally, one of the most interesting stories of the financial year FY23 was the Rs16,356 crore of mobilization through the closed ended fixed term plans (FTPs). The higher yields on bonds and the attractiveness of locking in high yields for over 3 years appealed to the investors. However, there was one more interesting factor that boosted the demand for FTPs, especially in March 2023. As per the Finance Bill, the traditional debt funds would not be eligible for concessional long term capital gains tax benefits and that benefit would only be available for debt funds holding between 35% to 65% in equities. That means, FTPs would lose their advantage of concessional LTCG tax and also the benefits of double indexation. The strong inflows in March were one last attempt to make the best of this window.

Mutual fund NFO mobilizations in FY23 were nearly 42% lower compared to FY22. However, this could be attributed to the sharp fall in NFO flows into BAFs and flexi cap funds. The SEBI freeze on NFOs for two months also led to loss of momentum in NFOs. Hopefully, FY24 promises to be more robust.