Why Mutual Fund NFO collections fell by 42% in FY23

New fund offerings were relatively dull in the financial year FY23 as compared to the previous year. Now, new fund offerings or NFOs are important for two reasons. They offer an opportunity for fund houses to onboard new mutual fund customers. Secondly, it gives the fund house an opportunity to offer a new product to the customer and a new investment story. The success is not only a function of a good product, but also the right market conditions, the right pitch, the right marketing strategy and the bancassurance network that is leveraged by the fund house. That brings us to the moot question; why did NFOs in FY23 fall sharply below the FY22 levels. But first a look at the NFO story for FY22.

NFO story for FY22 – The Year before last

Data Source: AMFI

What are the key takeaways from the NFO flows in the year before last i.e., FY22.

• There were 2 months when the monthly collections via NFOs were more than Rs20,000 crore and 4 months when the monthly collections were more than Rs10,000 crore. The total yearly NFO flows for FY22 stood at Rs107,986 crore.
   

• The category that attracted the maximum NFO flows was the flexi-cap and multi-cap category. The new category established resulted in a number of funds rushing to fill the gap with NFOs. Also, the flexi cap and multi cap category were welcome for the alpha seekers. Not surprisingly, flexi caps / multi-caps saw NFO flows of Rs37,674 crore.
   

• Dynamic funds or balanced advantage funds (BAFs) were a big hit in FY22, largely driven by the record collections in the SBI BAF NFO, that almost collected 70% of all BAF NFO flows in FY22.
   

• Thematic fund continued to get solid inflows as is evident from the small cap, mid-cap and sectoral plays that attracted NFO flows of Rs15,840 crore. Investors were willing to venture into NFOs where there was specific alpha visible for them.
   

• The lure of passive funds was also quite strong in NFO action in FY22. Passive funds comprising of index funds and index ETFs also attracted Rs23,466 crore of NFO flows in FY22.

Overall, FY22 was a robust year for the NFO flows into mutual funds led by specific categories like multi-caps, flexi-caps, BAFs, alpha seeking funds and passives.

NFO story for FY23 – Why it was 42% lower?

Mutual fund collections via new fund offerings (NFOs) for the financial year FY23 stood at Rs62,342 crore. That is 42.2% lower than the NFO collections of Rs107,896 in FY22. To an extent, the NFO flows in FY23 were impacted by factors like volatile markets, tepid FPI flows and global headwinds. The table captures the break-up of mutual fund NFOs in FY23.

Data Source: AMFI

Here are some of the key takeaways from the NFO flows in FY23 and why they were sharply lower than FY22. After all, unlike in FY22, the fiscal year FY23 did not have even a single month with more than Rs10,000 crore of collections.

• Thematic equity funds were the one category where FY23 had a better run than FY22. This was largely due to the surge of interest in mid-cap, small cap and sectoral stories during the fiscal year in search of alpha. Also, many of these sectoral and thematic funds do not have any restrictions from SEBI on the number of schemes from an AMC.
   

• While multi-cap and flexi-cap were nowhere close to the euphoria of FY22, passive fund did see some buying interest. During FY23, index funds (equity and debt) mobilized Rs6,004 crore while ETFs and FOFs (fund of funds) also mobilized Rs3,376 crore. The trend appears to be that where there was search for alpha, investors were preferring NFOs of mid-cap, small cap, or sectoral themes. For more diversified plays, there was a preference for lower cost passive funds.
   

• An interesting sidelight of FY23 was the strong collections by closed ended fixed term plans to the tune of Rs16,356 crore via NFOs in FY23. Apart from locking into higher yields, there was also a capital gains tax angle. Under the new Finance Bill, long term capital gains tax benefits were being withdrawn for pure or near-pure debt funds. The month March saw the last hurrah for these funds to make the best of the tax benefits.
   

• Finally, there was the 2-month NFO freeze imposed by SEBI during the months of May 2022 and June 2022. This was to ensure full compliance with its latest rule that funds should be directly transferred from clients to AMCs and not through brokers or advisors. The idea was to prevent misuse of funds. This delay in compliance forced a 2-month freeze on NFOs in FY23.

Overall, FY23 NFO mobilizations were 42% lower compared to FY22. While the reduced attractiveness of BAFs and flexi-caps played a role, the SEBI freeze also led to tapering of NFO flows in FY23.