Big Is Beautiful For Mutual Funds

MUMBAI: When it comes to pooling investments, small is just not good enough. The Indian mutual fund industry is slowly waking up to the concept of ‘mega funds’. According to mutual fund distributors, major fund houses have begun launching schemes with stiff NFO mobilisation targets in the range of Rs 5,000 crore to Rs 10,000 crore.

Until now fund houses have been launching schemes by fixing NFO mobilisation limit in the range of Rs 1,500 crore to Rs 2,000 crore. Though there are more than 550 equity schemes in the Indian market, there has been only two instances when NFO mobilisation has exceeded Rs 3,000 crore.

The plain vanilla Reliance Equity fund, launched in June 2006, collected Rs 5,790 crore in the NFO phase while the UTI Equity Fund of April 1992 netted around Rs 4,772 crore. If fund distributors are to be believed, the recently-launched Sundaram Energy Fund, UTI Infrastructure Fund and ICICI Prudential Infrastructure fund have already raised their NFO targets to around Rs 5,000 crore. The Reliance Natural Resources Fund, expected to be launched in January 2008, is said to have fixed an NFO mobilisation target of Rs 10,000 crore.

“If you look at it from the distribution point of view, mega funds differ in size and product distribution,” says Bajaj Capital CEO Anil Chopra. “Most mega funds these days have a minimum NFO mobilisation target of over Rs 4,500 crore. They would distribute applications in the range of 10-25 lakhs in a bid to pool the targeted sum. In a normal issue, application size would not usually exceed 4 lakhs,” he adds.

With around four major mega fund offers in December and January, net NFO collection during the period is likely to be a bit more than Rs 30,000 crore. But what is the logic behind launching mega funds?

“Pure business,” says the chief investment officer of an international fund house. “Mutual funds make money on assets they manage; that is, more assets the fund house raises, the more profitable its is. Secondly, fund houses are trying to corner investors who are petrified of the amazing bull run the market has had over the past three-four months. Newsflows pertaining to instabilities in the market, bleak outlook and concerns over external market are helping AMCs to hunt down investors,” says the CIO of an international fund house.

Fund houses are likely to collect huge money as, historically, November, December and January are usually good months for mutual fund schemes. All the more encouraging is the fact that there are a large number of private equity funds and HNI investors who have raised billions of dollars for investments.

Industry experts say that so far they have been sitting on huge amount of cash. But in the coming two months they have to deploy that money. Mega funds would provide good investment opportunities for these bulge-bracket investors, experts say.

“Launching mega funds is not a very desirable trend. This will flood AMCs with lots of money, beyond their capacity to deploy these funds meaningfully. It is always easier to direct Rs 500 crore in 10 tranches than Rs 5,000 crore at one go. The hype generated while marketing these funds will give false hopes to investors.