There is a joke…
Two women were walking through the woods when a frog called out to them and said: "Help me, ladies! I am a stockbroker who, through an evil witch's curse, has been transformed into a frog. If one of you will kiss me, I'll be returned to my former state!"
One woman took out her purse, grabbed the frog, and stuffed it inside her handbag. The other woman, aghast, screamed, "Didn't you hear him? If you kiss him, he'll turn into a stockbroker!"
The second woman replied, "Sure, but these days a talking frog is worth more than a stockbroker!"
Newspapers have reported that Equity NFOs (New Fund Offers) have reached an 8 year low. I’d say that is good news. You all will remember the NFO craze of 2004-2008. This was a ridiculous time in the history of India. There were NFOs every month. The fund houses were advertising them like crazy. And Indian equity investors poured out crores of savings in these schemes.
Here is the deal on scam behind the NFOs.
The SEBI allowed the fund houses to 6% of the NFO collections to be debited to the expenses account for all NFOs. This allowed the fund houses to immediately “transfer” certain expenses to the NFO. The fund houses had a major problem about retaining their fund managers on account of their fees. The fund managers were in high demand at all fund houses. An NFO would permit the fund house to nominate the name of such a fund manager and thus give a window of opportunity to indirectly hike the compensation to the fund manager.
The NFO would allow the fund house to market the NFO along with the name of the fund house. This advertising expenditure of the fund house would be borne by the NFO and its gullible investors - the fund house would not have to debit the advertisement expenses to the existing funds. The existing fund investors thus profited at the expense of the new fund investors.
It was a rarity if the NFO was significantly different from the existing funds in the fund house’s portfolio. The fact that the NFO was not so different from the existing portfolio is a hint to all investors of the real intention of the fund house – basically redirect expenses to the NFO and make the existing funds more profitable as a result.
The stock brokers and the middleman played a very clever game in the marketing of the NFOs. The standard marketing line offered to the investor was that the fund was offering its units at a NAV of INR 10.00. Any investor worth his salt should have figured this one out as the NAV offer rate could be any amount as it makes no difference. The investors were fooled by the perception that they were getting equity at INR 10.00 in a booming market. The stock broker just played their clients like a song.
There are other tricks in the NFO business but the above should suffice. SEBI cracked down hard on the mutual fund industry and thus we see that fund houses are rarely advertising their existing funds and those NFOs are rare.
Ever wonder about the crackdown on the mutual fund industry? Is it for the investors? “Aaah… humbug!” as Ebenezer would say. However, I leave it to you to figure it out and ponder over the holidays.
In an unrelated story, the Times of India reports that a stockbroker in Mumbai was killed by four of his clients. Below is a link to the story
Happy Investing!!
© Nitesh Kotecha
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