Track record, not NFOs will draw MF investors
The last couple of months have seen a revival of activity in the mutual fund industry. I’m talking here of individual investors and equity products aimed at them. From August to December, investors had only pulled out money from equity funds and not put in any fresh funds on a net basis, writes Dhirendra Kumar.india Updated: Mar 08, 2010 22:00 IST
The last couple of months have seen a revival of activity in the mutual fund industry. I’m talking here of individual investors and equity products aimed at them. From August to December, investors had only pulled out money from equity funds and not put in any fresh funds on a net basis. In the new business situation created by the elimination of entry loads by SEBI, fund companies, too, had seemed unsure of how the business would work. Over time, another set of regulatory changes have ensured that all the marketing and other expenses incurred in launching a new fund have to be borne by the fund company and cannot be charged as issue expenses from the investors’ money.
Over the last two months, a couple of things have changed. One, investors have started investing money into funds again. And second, just as importantly, fund companies have finally started pitching existing funds to investors. Since its very inception, the primary way of getting investors to put money in mutual funds has been to launch new funds. New funds were easy to market because of a number of reasons. One, much of the cost could be passed on to investors. Two, track record didn’t matter. And three, new features could be invented (sector, theme etc) which could serve as a mostly-spurious product differentiator from existing funds. Like any consumer product, this product differentiation gave the marketing and sales people something to create an exciting story around.
Now, one by one, all these reasons have fallen by the wayside. As I’d explained earlier, cost cannot be passed on to the investor. Another regulatory change has been that SEBI has finally become tougher about approving new funds. Apparently, fund companies now have to work hard to prove that a new fund is fundamentally different from existing ones. The result is that new fund approvals are hard to come by.
The result is that fund companies have now started actively marketing existing funds. If you pay any attention to recent mutual fund advertising, you will mostly see older funds being advertised on the basis of their track record. While this process is only now beginning, one can be certain that it will eventually bring about a sea change in Indian mutual funds, the biggest being that actual fund performance will start mattering a lot more.
Funds with a good track record will attract assets and those with poor track record will not. There are still many variables left, mostly about how well will investors be able to evaluate performance, but nonetheless, I think one can safely say that the time when new funds were the dominant vehicle for fund investing is behind us.