Here's What's Powering The NFO Rush

Five new equity-oriented schemes launched in August garnered total investments worth Rs 22,770 crore, according to industry data compiled by Jefferies. That's the highest in at least two years since the regulator reclassified schemes.

SBI's Balanced Advantage Fund cornered the biggest share at Rs 14,550 crore—also the highest inflow for an NFO in at least two years. Nippon India's Flexicap Fund followed at Rs 2,860 crore.

SBI’s Balanced Advantage Fund debut-month inflows were higher than the entire mutual fund industry’s NFOs worth Rs 13,700 crore in July, a month dominated by ICICI Pru Flexicap Fund’s Rs 9,800 crore offer.

That came as markets broke out of range-bound trading of June and July. Benchmark Nifty 50 scaled new records in August and September, shrugging off fears of a correction.

It’s a combination of liquidity and a huge bull run in Indian and U.S. markets that has given investors “extra confidence” to put more bets at higher levels in the equity markets, including new fund offers, according to Sunil Jhaveri, an investment adviser and founder of MSJ Capital & Corporate Services.

“Investors have seen IPO listing premiums and expect something similar through NFOs,” Jhaveri said. But they are buying into new equity schemes with a “misguided notion” that they are cheap at Rs 10 net asset value, Jhaveri.

“There is a fear of missing out, because their friends or neighbours have spoken about their IPO conquests and huge gains on listing. Little do investors realise that entry points are as important as exit points.”

July and August mark a rebound in NFO activity after inflows dipped to about Rs 193 crore in June. The month capped a declining trend barring a spike in May driven by Aditya Birla Sun Life Multi-Cap Fund. Compared with 21 NFOs in the seven months through July, August alone saw 11 new schemes.

Asset management companies are simply supplying what is being demanded, Jhaveri said. “They can only garner corpus when markets are in bullish zones backed by huge liquidity. As a manufacturer, why would they not come out with NFOs?"

It is for the investors to decide whether a particular NFO is required in their portfolio based on various criteria including asset allocation and the current market valuations, he said.

Interest in equity markets continues despite calls of caution. The benchmarks have already defied the so-called markers that were precursors of a correction in the past.

Retail investors’ confidence has risen as many believe that equity markets have stabilised at higher levels, said Sachin Jain, a mutual fund analyst at ICICI Direct. They feel “left out” and see NFOs as a better way to participate as the fund manager will gradually deploy money as per market volatility, he said.

Also, since such a volume of NFOs came after a long time, many distributors renewed business interest as well, he said.

Kshitiz Mahajan, co-founder of financial and wealth management firm Complete Circle Consultants, said it’s the addition of international stocks as a new asset class that's attracting people.

And the two funds that got the highest allocation—ICICI MultiCap and SBI BAF—did well because people want to diversify their money, keeping potential corrections in mind, he said.

Mahajan said investors are also switching from existing funds, besides moving money to mutual funds as the fixed deposit rates are low.