For the Indian Mutual Funds NFO, they are having a money making funtime. A recent NFO garnered 2700 crore rupees, and imagine, 85 crores were paid as marketing fee for their own subsidiary, for doing nothing!
They are having a ball of time, like paying part of the 6% - upto 3% to their own marketing subsidiary! (Reliance is the only exception - a very good fund, next comes Sahara).
SEBI regulations allow a fund house to spend up to 6 per cent of the amount collected during a new fund offer on initial issue expenses and charge this to fund.
Earlier, funds charged the entire initial issue expenses to the starting NAV, when the fund re-opened for subscription.
As the entire issue expenses were lopped off from the first NAV, a new fund would usually open below par (if the stock market hadn't risen sharply in the meantime).
But over the past couple of years, fund houses have moved to a practice where initial issue expenses are "amortised", or spread out equally over a five-year period.
This prevents a new fund's opening NAV from taking a knock, instead phasing out the impact of issue expenses on the NAV over its first five years.
