SEBI has reduced the New Fund Offer(NFO) period from existing 30-45 days to 15 days. It has also allowed the use of Application Supported by Blocked Amount(ASBA) facility while applying to new fund offers.
Before trying to understand what exactly this means and how would it benefit the investors, let’s look at the the scenario that exists currently.
A typical new fund offer from any mutual fund house lasts from anywhere around 30 to 45 days. This means that you have 45 days to apply to the offer. If you are one of the early birds who decides to invest as soon as the NFO opens, your money stays parked with the fund house for 45 odd days without earning you anything before it gets invested. However, during this time, the fund house earns a decent interest income on your money.
To ensure that you are the one who earns interest on your money and not the fund house, SEBI has mandated the following changes:
- Allowing use of ASBA facility
Application Supported by Blocked Amount(ASBA) is a facility wherein the money you intend to invest in an NFO stays in your bank account and consequently earns you the interest. The money leaves your account only when units are allocated to you. While in your account, this amount stays blocked ensuring that you cannot use it for any other purpose. However, if you wish, you can still apply using cheques/demand drafts. - Reduction in NFO period
This will benefit the investors who opt not to use the ASBA facility and invest using cheques or demant drafts. If you invest using cheques or demand drafts, your money will be transferred to the fund house immediately thereby causing loss of interest to you during the NFO period. By reducing the NFO period to 15 days, SEBI has reduced the notional loss of interest to such investors. - Allotment of units should be within 5 business days after NFO closure
Within 5 business days after the closure of NFO, the fund houses should ensure they do the following:- Allot the units
- Dispatch the statements
- Make all schemes (except ELSS) available for repurchase/sale/trading.
These rules would be applicable to all NFOs that launch on or after 1st July 2010.
Since the last couple of years, SEBI has been working hard to protect the interests of mutual fund investors. Abolition of entry loads, making mutual funds available through alternate channels like stock brokers, etc. have definitely benefited the investors. The new NFO regulations continue this trend.
What else do you think needs to be changed to make NFOs more efficient?
