Ban on upfront commission, uncertainty in equity markets hit new offers

Collections from new equity and debt fund offerings dipped significantly this year, given that the ban on upfront commission, debt turmoil, and the uncertainty in equity markets all restricted launches and also limited inflows.

The frontline indices have risen close to 15 per cent year-to-date, led by a rise in a handful of stocks. 

As a result of the polarisation and underperformance of mid- and small-cap stocks, diversified equity schemes have not done particularly well. “The markets have not been supportive and only a few stocks have risen, with the result that one-year and two-year SIPs are not doing well. If the current portfolio is in the red, investors are bound to wait and watch before committing fresh money,” said Amol Joshi, founder of Plan Rupee Investment Services. 

Ironically, the lack of a track record has helped sell some of these new offers in the backdrop of the underperformance of several existing schemes. New funds come with no baggage in terms of returns and are more agile, as the corpus managed is smaller. The Securities and Exchange Board of India (Sebi) has imposed a ban on upfront commission and prohibited upfronting of any trail commission either directly, or through cash/kind and any other route. 

The diktat has impacted new launches, particularly those of closed-ended products, which would have attracted commission of as high as 5-6 per cent, earlier. 

According to experts, most fund houses are launching new fund offerings (NFOs) to fill the gap in their portfolios, not to garner revenues. 

While distributors benefit from slightly higher trail commission, incentives are lower as there is no upfront payout. 

“The switch to an all-trail model of paying commission could have impacted fund raising by fund houses. What’s more, closed-ended funds have traditionally been launched in the mid- and small-cap segments. Mid- and small-caps have corrected this year, impacting sentiment against such launches,” said Dhaval Kapadia, portfolio specialist at Morningstar Investment Advisers India.  New equity offerings have also been hit by Sebi’s one-scheme-per-category diktat, which came into play last year. Fund houses, especially the mid- and smaller ones, have been launching schemes to complete their portfolios, since the last year. 

Sebi has broadly classified all equity schemes under 10 categories. There is no restriction on number of index funds, exchange-traded funds, fund of funds, and sector/thematic funds that can be launched.

“Most of the AMCs now have funds across different categories. Once the product basket gets filled you cannot launch another fund in any of the key categories specified by the regulator,” said Kapadia. 

Product launches on the debt side were hit by the risk aversion resulting from the IL&FS episode. The launch of fixed maturity plans, for instance, was hit by the reluctance of investors to lock their money for a longer duration and the preference of safety over returns.  “A few FMPs did not return money on time or did not deliver the expected returns because of a few credit events. This has dented their attractiveness,” said Joshi.  NFO collections were boosted by two tranches of Bharat 22 ETF and Bharat Bond ETF, India’s first corporate bond ETF. The latter fetched Rs 12,400 crore.

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