What are the proposals cleared by Sebi?
The capital markets regulator said that a new fund offer (NFO) of a mutual fund scheme must invest the money it raised within 30 days from the end of the scheme launch period. It also said in the event of a switch from an existing scheme into an NFO, distributors will get the lower commissions of the two schemes.How does fund deployment in 30 days help unitholders?
This move to cut the period to 30 days from 60 could result in mutual funds raising in its NFOs only as much monay as it deems possible to invest within 30 days. There are several instances where fund managers delay the deployment of funds garnered in NFOs, especially in the thematic segment, because of expensive valuations. Still, they raised money from investors because the theme was red-hot and witnessed a lot of interest, making it a marketing exercise that mostly benefitted distributors. Sebi was concerned that such NFOs benefitted the mutual fund and distributors, while it went against the unitholders’ interests. In case the fund house fails to deploy the NFO money within 30 days, investors will have the option to exit the scheme without paying any exit load.
How will the move to tighten distributor commissions during fund switches help unitholders?
Mutual funds and distributors often push investors to shift from schemes that investors held for a while to equity funds that charge higher fees. Many distributors got investors to switch from mutual fund schemes that earned them a lower trail fee to a new fund from the same fund house that gives them a higher brokerage. In most cases, this was detrimental to the interest of unitholders. Now, with distributors set to get lower commissions of the two schemes during the switch, there will be no incentive for the distributor to push investors to churn.
Will this hurt new fund offers (NFOs)?
It is possible that this could result in fewer fund launches. Mutual funds that launch schemes to keep distributors happy will under be less pressure to keep coming out with NFOs.
