03 Oct Did you know: How Are New Mutual Fund Products Launched by Fund Houses?
Broadly speaking, any one in a fund house is free to come up with the idea of a new scheme…
You must have read many reviews of new fund offers (NFOs) in Mint. But do you know how an NFO is launched? What happens at a fund house from the moment the idea to launch an NFO is born, to the day when you can go ahead and invest in the new scheme?
Birth of the idea
- Broadly speaking, any one in a fund house is free to come up with the idea of a new scheme.
- However, typically these ideas come from investment, sales, marketing and products teams.
- At this stage, the idea needs to be such that the long-term needs of investors are met. After the idea is formally proposed, the senior management (chief executive officer, chief investment officer, some senior fund managers, and heads of key functions like sales, marketing, and compliance) discusses it.
- If they find the idea to be good, they send it to a separate team whose duties include continuously evaluating the fund house’s own products as well as the competition. Called the product team, it is present in most fund houses.
- The products team then prepares a note, detailing: what the idea is and what it can accomplish, whether there is enough demand for it, how much money can be raised for it, the scheme’s scalability and the economics of running it.
- This note is then given to the top management. They also assess the fund house’s management capabilities. For instance: if the idea is to launch a credit fund, they could evaluate if the fixed-income team has the necessary capabilities to analyse credit opportunities. If the idea was to launch an international fund, they may want to assess if the fund house can analyse stocks and sectors from foreign markets on a daily basis.
Taking it forward
- If the fund house has an international partner, the international products team also vets the idea. Here too, the idea can get rejected even if the Indian partner has approved it.
- Once the top management is convinced, it puts forth the idea to the board of trustees. The Board asks several questions and satisfies itself that the proposed launch is unique and that there are no duplicates within the fund house. Trustees are mandated to certify this in writing. Then, the fund house makes a draft offer document and submits it to the capital market regulator Securities and Exchange Board of India (SEBI).
SEBI Accepts or Rejects
As SEBI is the regulator that oversees the entire mutual funds industry, it gets many such proposals from several fund houses. It vets each and every proposal, examines the fund strategy to ensure that it is in line with all the rules and regulations.
In the past 2-3 years though, SEBI has become very strict and held back many proposals on account of hundreds of already-existing products in the fund industry. SEBI felt that not only does the mutual fund industry have too many products, but quite a few of proposals look similar to existing in-house schemes.
Once SEBI approves (which can take 21 days to as much as a year), your fund house prints the final offer document and launches the product. That’s when you get to invest in it.
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