Mutual fund ready IPO line-up ahead of July deadline

The Securities and Exchange Board of India (SEBI) has long had a problem with the concept of pool accounts wherein mutual fund investments were routed through the broker pool accounts. This problem became more pronounced after the Karvy fiasco, wherein the client funds were used by the promoters for their own personal use, as also client shares. After that, SEBI in its revamp of the capital market system had asked that this system be scrapped totally and the mutual funds put an alternate system in place. 

As a result, SEBI had banned mutual fund AMCs from launching new fund offering (NFO) schemes till the new systems pertaining to pool accounts were put in place. With the deadline for the new system of pool account implementation set at July 01st the mutual fund houses are bracing up to launch new schemes in the market place. Obviously, due to this deadline, the launch of new fund offers (NFOs) had been paused for last few months. However, now a spate of such funds are already approaching SEBI for approval.

However, the market regulator (SEBI) is only going to give permission for any of the NFOs after the Association of Mutual Funds in India (AMFI) gives final confirmation that the requisite processes pertaining to the pool account are in place. However, most mutual funds have lost out in the hiatus and they are aggressively lining up new issues to be fully ready once the ban is lifted. Some of the recent NFO filings include Sundaram Flexicap Fund, Baroda BNP Floater Fund, LIC MF Multi Cap fund, Templeton BAF and Axis Duration Fund.

In fact, it is not just about NFOs but even AMCs are planning to launch new schemes once this deadline ends on July 01st. Some of the names getting ready to launch new funds among recent entrants include Navi MF, White Oak MF, Samco MF and NJ MF. Navi MF is floated by former Flipkart founder, Sachin Bansal. SEBI has already started issuing observations on NFO filings. The mutual funds had earlier assured SEBI that no new funds would be launched till the new system was in place. 

What exactly is this pool account issue? In fact, post the Karvy fiasco, SEBI had asked mutual fund houses to ensure that no MF distributor, online platform (agnostic or otherwise), stockbroker or investment advisor can pool money of investors in a bank account and then transfers it to the fund house. This was called syndicating, which was permitted in the past but now is no longer allowed. The agent then purchases units of schemes for these investors. The new system will ensure that the money does not get misused.
 

In fiscal year FY22, the mutual fund industry saw record collections of Rs96,00 crore via NFOs, which is an all time record. However, most of the fund launches were index funds or exchange traded funds (ETFs) or funds with a theme or sector bias. Multi-cap funds and BAFs (balanced advantaged funds) were the most sought after product among NFOs, if you look at the colour of inflows. One reason for the popularity of Index funds and ETFs is that SEBI’s one scheme per category rule does not apply to these funds.

However, most of the investment advisors continue to remain cautious about NFOs. It can create a myth of low pricing just because it is issued at a unit value of Rs10. However, that is the wrong perception. Effectively, NFOs get mis-sold. That is why advisors insist that investors should ideally stick to existing funds with established and verifiable track record.