Mutual fund NFOs report a tepid first half in FY24

15 Oct 2023 , 10:30 AM

With a large number of new funds in the market in the last couple of years, one would have logically expected a deluge of new fund offerings (NFOs) in the first half of FY24. Over the last few years, NFOs have been constrained because each AMC is only allowed to launch new fund offerings (NFOs) in case they do not have any fund of that category already. However, there are certain exceptions. For instance, sector fund and thematic funds are outside the ambit of this restriction. 

For instance, HDFC AMC can have just one pharma fund, but that does not stop them from launching sectoral and thematic funds of other sectors and themes. The other exception is index funds and index ETFs and here again there is no restriction and the same AMC can launch multiple index funds and index ETF on different indices or combination of indices. A similar leeway is allowed in the case of dynamic allocation funds and multi-asset allocation funds. That is why you would find that most of the action on the NFO front in the last 3 years has been focused on these specific themes. 

Let us now turn to how the NFO scene played out in the first half of FY24, ended September 2023. To get a better perspective, we also do a recap of the NFO flows in FY22 and FY23, so that the colour and direction of NFO flows is understood in the proper perspective.

Recap – NFO story in FY22

In fact, the NFO story of FY22 was one of the best in recent years, with the Indian economy starting to recover from the long COVID pandemic. At the same time , there was a lot of liquidity in the system due to the helicopter money generously doled out by the government. The table below captures a quick picture of how the NFO story panned out for mutual funds in FY22.

Full Year  FY22	Thematic Funds	Flexi/Multi Cap Funds	Index Funds	Other ETF FOF	Close End FTPs	Dynamic Funds BAF	Income Funds	Total  (Rs cr)
Apr-21	35	0	52	30	94	0	329	540
May-21	1,203	1,922	227	2,148	0	0	410	5,910
Jun-21	193	0	165	0	732	0	0	1,090
Jul-21	3,901	9,808	0	1,737	241	0	1,645	17,332
Aug-21	3,384	3,479	405	336	899	14,551	614	23,668
Sep-21	3,069	3,510	1,096	115	493	0	0	8,283
Oct-21	0	0	1,047	1,220	251	5,216	0	7,734
Nov-21	478	0	328	60	797	1,042	0	2,705
Dec-21	2,937	9,509	161	6,510	450	474	575	20,616
Jan-22	0	0	2,490	228	227	0	285	3,230
Feb-22	640	1,276	1,062	332	203	0	0	3,513
Mar-22	0	8,170	3,596	121	1,364	0	24	13,275
NFO Total	15,840	37,674	10,629	12,837	5,751	21,283	3,882	1,07,896

Data Source: AMFI

The full fiscal year FY22 from April 2021 to March 2022 saw total NFO flows of Rs1.08 trillion approximately. That makes it one of the best years in recent period. The biggest contributor in FY22 was the multi cap / flexi cap fund category which saw flows of Rs37,674 crore via NFOs. With the markets bouncing back sharply, investors also saw big opportunities in a more diversified portfolio. A major chunk of the flows in the fiscal year came from Dynamic Allocation Funds (BAFs) which collected Rs21,283 crore, but nearly two-thirds of the flows was dominated by the SBI BAF NFO. 

The other equity fund category that saw a lot of NFO interest in FY22 was thematic funds with interest spread across sectoral funds, thematic funds, mid cap funds and small cap funds. Not to forget, this was also the year when passive NFOs made a big splash. Index ETFs and Index Funds (both debt and equity), saw NFOs to the tune of Rs23,466 crore, marking the first major shift from active funds to passive funds. At least, the Indian investors started giving equal importance to beta hunting as to alpha hunting.

Recap – NFO story in FY23

The NFO story of FY23 was robust, although not as convincing as FY22. To an extent, it was also because the NFOs were blocked for two months due to most AMCs not adhering to the SEBI requirements on stopping agent mandates. Hence in FY23, there were no NFOs in May and June 2022. However, the NFOs did manage to build traction in the remaining 10 months and close the year FY23 with Rs62,342 crore of NFO collections. The table below captures the story of FY23 in the NFO arena.

Full Year  FY23	Thematic Funds	Flexi/Multi Cap Funds	Index Funds	Other ETF FOF	Close End FTPs	Dynamic Funds BAF	Income Funds	Total  (Rs cr)
Apr-22	3,130		91	19				3,240
May-22	0	0	0	0	0		0	0
Jun-22	0	0	0	0	0		0	0
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	0	7,187
Mar-23	3,841		634	181	3,878		30	8,564
NFO Total	21,403	8,190	6,004	3,376	16,356	3,355	3,658	62,342

Data Source: AMFI

The full fiscal year FY23 from April 2022 to March 2023 saw total NFO flows of Rs62,342 crore, which is sharply lower than the NFO flows of FY22. However, that can be partially attributed to the 2-month freeze on NFOs, partially on the FPI selling and substantially on the overall volatility in the equity and bond markets. What were the big drivers of NFO flows in the fiscal year FY23? 

More than one-third of the flows at Rs21,403 crore came in through thematic funds. That is not surprising as investors sought alpha through categories like sector funds, thematic funds, small cap fund and mid-cap funds. In most cases, these thematic funds also delivered the goods. As investors became increasingly weary of large cap funds, the focus was two-fold. Prefer index funds and index ETFs to target beta and look for thematic and sectoral funds for alpha. The second highest contributor of NFOs in FY23 were the closed index fixed term plans (FTP), which collected Rs16,356 crore. The idea was for investors to smartly lock themselves into higher yields in the light of the spike in interest rates. Other than these two, there were also significant contributions from flexi cap funds and passive funds too.

How have NFOs panned out in the first half of FY24?

If FY22 had seen robust NFO flows and FY23 was relatively tepid, the first half of FY24 (H1-FY24) has been very insipid in the first half in terms of NFO flows. The global headwinds and the volatility in the markets are making the investors wary and that is also making the funds wary about launching NFOs.  The table below captures the performance of NFOs in the first half of FY24.

First Half of FY24	Thematic Funds	Flexi/Multi Cap Funds	Index ETFs Funds	Other ETFs FOF	Close End FTPs	Hybrid Funds	Debt Funds	Total (Rs crore)
Apr-23	1,612	0	34	10	0	101	71	1,828
May-23	174	0	142	0	103	64	0	483
Jun-23	2,818	220	63	15	0	112	0	3,228
Jul-23	1,540	1,471	176	122	0	0	3,414	6,723
Aug-23	2,556	2,446	31	63	188	2,247	0	7,531
Sep-23	1,629	874	48	11	0	5,233	0	7,795
H1 Total	10,329	5,011	494	221	291	7,757	3,485	27,588

Data Source: AMFI

The first half of FY24 saw NFO collections of Rs27,588 crore, which is less than half of what NFOs collected in the first half of FY22. It is higher than what NFOs collected in the first half of FY23, but that is misleading since NFOs were shut for 2 months in the first half of FY23. But here is what we read from the NFO data for H1-FY24.

• The NFO flows were dominated by thematic and sector funds that saw Rs10,329 of NFO flows in the first half. NFOs have been fairly large in number, although the collections have been quite small across NFOs. The other equity category of multi-cap and flexi-cap funds also saw NFO flows of Rs5,011 crore. 

   

• The hybrid funds saw some serious inflows of Rs7,757 crore, but that was predominantly through multi-asset allocation funds. Investors are getting increasingly sold on to the idea of spreading their bets across multiple asset classes and also using derivatives to enhance returns and risk management. 

   

• Interestingly, income funds also saw inflows of Rs3,485 crore in the first half, but this was largely funds raised by the newly launched Bajaj Finserv MF, predominantly through liquid funds.

To sum it up, the NFO story in the first half has been fairly tepid. It remains to be seen, if the NFO scene picks up in the second half. For that we need more robust market conditions and stability in bond yields. Only then, the AMCs will have to conviction to launch NFOs. We have to wait till then.