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Step In With Eyes Open

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Some investors feel that mutual funds are launching too many New Fund Offerings (NFOs) and it is leading to confusion. When the pharmaceutical industry offers a vast range of products, giving doctors the choice to meet different requirements of their patients, it is hailed as research driven and innovative. When a chef at a hotel lays an extensive menu of dishes to satiate the taste buds of its clientele, he or she is hailed as an expert providing choice. Why then blame the mutual fund industry for creating confusion when it is trying to give a range of alternatives to investors?

Investors should note that all mutual fund schemes are governed by SEBI regulations. As per SEBI regulations, the Board of Trustees gives an undertaking that the new mutual fund offering is distinct and different from the existing schemes. It is not that NFOs are launched recklessly. There is a detailed process of understanding customer requirement, segmenting market opportunities and improving risk-return profile before an NFO is launched.

Based on past analysis, the mutual fund industry has launched NFOs to offer either specialised products to meet the requirement of an investor class or offer an opportunity based on market view. Gilts funds were launched to bring provident fund (PF) trusts in to the mutual fund fold. Floating rate funds were launched to protect against rising interest rates. Thematic funds were launched to participate in growth opportunities in sectors such as infrastructure and services. Arbitrage funds were launched to improve the risk return profile over short-term debt funds. Close ended funds were launched to push long-term equity investment habit among investors. Each NFO was an improvisation or an innovation to meet the needs of a distinct investor segment or present them with a market opportunity.

NFOs are no different from existing schemes in terms of investment management. We at ICICI-Prudential Mutual Fund launch an NFO after undertaking a detailed scientific research of investor needs and market opportunity. We also collect distributor and investor feedback for the proposed NFO. At no point of time do we dilute our focus on existing products.
NFOs, like all other existing mutual fund schemes, are regulated by SEBI in terms of pricing as well as distribution commission and other marketing costs. As a fund house, our objective is to introduce as many products as possible which serve the need of various customer segments or provide a market opportunity on a sustainable basis.

I will recommend to investors to understand each NFO either through his own efforts or using the services of a financial planner for better understanding of the product. Most mutual funds provide concise presentation and product notes which are available at various distributor outlets as well as on the websites of the fund houses. This is besides the detailed offer documents filed by them with Sebi. Investors should take advantage of the same and take an informed decision.

As the mutual fund products move from generalisation to specialisation, each NFO will not be suitable for every customer. The customer must be faithful to himself and should invest in a NFO only after understanding the product and only if it meets his or her requirement.

The author is Dy MD, ICICI Prudential Asset Management Company Limited
Businessworld Issue 25 Feb-3 Mar 2008

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