Mutual funds rework strategies on new plans

Fund houses look at investors’ requirements before launching new schemes, try to keep costs under control

As the Rs7.47 trillion Indian mutual funds (MF) industry comes to terms with the new no-load scenario and several such measures, mutual funds are reworking their strategies to launch new funds. No longer are new fund offers (NFOs) used as an excuse to gather assets. Apart from an occasional exception, fund houses expect to collect a modest amount. With a drop in distributor commissions and a need to keep costs in check, fund houses are tweaking their strategies to get more bang for their buck. Fund houses are, finally, trying hard to find a balance between what they want to sell and what investors really want.

Is the product relevant?

As NFOs are costly affairs, fund houses claim a lot more thought is going into whether a scheme makes sense or not. Historically, fund houses have launched funds to garner more assets. In April 2006, when the capital market regulator, the Securities and Exchange Board of India (Sebi), banned open-ended funds to charge 6% NFO expenses and later amortize that over a period of five years, fund houses took to launching closed-end funds. According to data provided by mutual fund tracker Value Research India Pvt. Ltd, fund houses had launched 43 open-ended funds and no closed-end fund in 2005 during rising markets. Between April 2006 and December 2006, 10 closed-end funds were launched that garnered Rs7,764.25 crore as against six open-ended funds launched that garnered Rs1,521 crore. In fact, when Sebi announced its decision in July to ban entry loads, a total of eight NFOs hit the market within a span of a month compensating distributors in a last-ditch attempt to woo assets; together these funds mopped up Rs1,260.79 crore in total, as per Value Research.

With entry loads abolished and fund houses having to compensate the distributors out of their own pocket, they have become realistic. “NFOs these days are purely need-based. Instead of aiming to gather assets under management, fund houses are paying more attention these days to see if a gap in an investor’s portfolio can be filled up by launching a new scheme. The days where you’d typically get two-three huge NFOs once a quarter are gone,” says Yogesh Kalwani, head (investment advisory), BNP Paribas-Private Banking. “Apart from abolition of entry loads, Sebi has been particular in ensuring that clones of existing schemes within the same fund house do not enter the market,” says Dhirendra Kumar, chief executive of Value Research.

Kumar also says that up until 2007, investors had forgotten that equity markets also fall, even if temporarily. The fact that investors’ capital has got permanently eroded in “in quite a few funds”, says Kumar, has made investors wiser.

Hard or soft launch

abolished and fund houses having to compensate the distributors out of their own pocket, they have become realistic. “NFOs these days are purely need-based. Instead of aiming to gather assets under management, fund houses are paying more attention these days to see if a gap in an investor’s portfolio can be filled up by launching a new scheme. The days where you’d typically get two-three huge NFOs once a quarter are gone,” says Yogesh Kalwani, head (investment advisory), BNP Paribas-Private Banking. “Apart from abolition of entry loads, Sebi has been particular in ensuring that clones of existing schemes within the same fund house do not enter the market,” says Dhirendra Kumar, chief executive of Value Research.

Kumar also says that up until 2007, investors had forgotten that equity markets also fall, even if temporarily. The fact that investors’ capital has got permanently eroded in “in quite a few funds”, says Kumar, has made investors wiser.

Hard or soft launch

Once fund houses decide on the product they want to launch and its viability, they decide on their decibel level—a “soft” launch versus a “hard” launch. Typically, a “hard” launch—such as DSP BlackRock Focus 25 Fund (DBF25)—would entail printing more forms, engaging as many agents as possible and wall-to-wall advertisements. A “soft” launch—such as Baroda Pioneer Infrastructure Fund or DWS Global Agribusiness Offshore Fund—is one where the fund houses launch a fund quietly. “Typically, we have our regional managers (RMs) shortlist the top 30-50 odd agents in their town and cities that they feel would rake in good business and have our RMs focus all their energies on a select few,” says Rajan Krishnan, chief executive officer, Baroda Pioneer Asset Management Co. Ltd.

Krishnan met Mint in one of a series of meetings with a few journalists over tea to talk about his newly-launched scheme, marking a contrast with glitzy press conferences and lavish luncheons in five-star hotels that characterized NFO launches till about a year ago.

Earlier, MFs could spend as much as 6% of their initial collection on marketing, sales and advertising and charge it to the scheme (the net asset value or NAV would drop by that amount) over a period of five years. If an equity fund NFO collects Rs1,000 crore, an AMC (asset management company) could spend a maximum Rs60 crore as issue expenses. Sebi first banned amortization of NFO expenses in April 2006 for open-ended funds and then in January 2008 for closed-end funds.

While “hard” launches are expensive, “soft” launches help curtail costs. For the first kind, a fund house prints and dispatches around three million forms and spends around Rs5-8 crore for advertising and marketing. The second sort of launch entails around one million forms and Rs2-4 crore for advertising and marketing.

Distributor events are no longer preferred to be held at five-star hotels. A typical luncheon at a banquet room at the Taj Mahal Hotel, Mumbai, would set back the fund house by around Rs2,300 (including taxes, soft drinks and juices) per person. If 100 people were to attend one such meet and the fund house holds 10 such events across the country, the fund house incurs around Rs23 lakh on such an exercise. The total cost now can be brought down to around Rs7.50 lakh.

“The choice of hotels is done carefully. The idea is to not to cut down on quality, but to save costs,” says Karan Datta, national sales head, Axis Asset Management Co. Ltd.

Adds a sales official of a Mumbai-based fund house: “Many fund houses prefer to go for ‘soft’ launches these days; garner a small corpus, build up a decent track record and then target fresh investors.”

Obviously, the collections are expected to be muted in “soft” launches. Market sources say that DWS Global Agribusiness Offshore Fund collected around Rs25 crore. This pales in comparison to the Rs1,500-2,000 crore that DSP BlackRock is expecting for DBF25.

Where to advertise

Advertising is another avenue where fund houses are chasing value. Instead of going after print, TV and outdoor advertisements (billboards), fund houses are picking and choosing.

A marketing official of a fund house whose NFO closed recently says that while a front page solus advertisement would cost between Rs11 lakh and Rs25 lakh (discounted rate), the same money could pay for 15-20 commercials on TV over several days.

MFs are allocating more money to TV than print, some analysts say.

Fund houses need to pare spending on advertising and marketing as much as they can. Say, a fund house spends Rs4 crore on advertising, marketing and sales on an NFO that garners Rs100 crore. It can charge around 1% as management fees, which is its own income from managing the scheme on an ongoing basis.

In other words, assuming the corpus of Rs100 crore stays with the fund house for the first few years, it earns Rs1 crore every year. At this rate, it would take at least four years for the fund house to make money on this NFO.

Source: http://www.livemint.com/2010/05/09223649/Mutual-funds-rework-strategies.html?pg=2