Unfortunately for gullible investors, they fall easy prey to new funds offers (NFOs) by mutual fund operators and campaigns by their high-profile brand ambassadors during a surging market when investor sentiments are high and overoptimistic. The NFOs are floated to capitalise on the mood of investors. Most of the investors get easily tricked as they are prone to believing claims or promises by fund operators.

Last year, asset management companies (AMCs) launched as many as 239 NFOs mobilising Rs 1,18,000 crore. Sectoral or thematic equity funds were the top choice of investors, according to a report by Germinate Investor Services Research. This was an all-time record. In 2023, AMCs launched 212 NFOs collecting Rs 63,854 crore. In the previous year, 228 NFOs were launched garnering Rs 62,187 crore. Today, if some of these investors seek to exit they are bound to lose substantially. Only those who don’t seem to lose are the fund operators.

Few mutual fund (MF) investors are aware of the various charges that can affect the overall returns. The typical costs associated with the operation of MFs are: management fees, administrative fees, distribution fees, audit and other operational fees, redemption fees, switching fees, MF brokerage charges, and other hidden charges. The latter can include costs like transaction fees for buying or selling within the fund, costs associated with certain investment strategies, or penalties for not maintaining a minimum balance.

The management fees are a core component of the expense ratio and pay for the fund manager's expertise in selecting and managing the investments within the fund. Some funds charge a redemption fee if units are sold within a short period after purchase, which is different from the exit load. In a market situation such as this, no recent investor can opt out of the investment even in an emergency situation without making heavy losses.

Few are aware of the loss of MF investment value in the last three years, which collected a total fresh investment of around Rs.2,44,000 crore. Even those so-called reliable large-cap funds have failed to operate satisfactorily. The AMFI’s own data showed that out of 33 large-cap funds, 28 funds could not manage even five percent returns in the last one year. Of these, 10 funds have given negative returns, falling as low as (-) 8.34 percent. Obviously, MF operators are not managing the investments well. That should be a matter of concern for all, including the regulator, the Securities and Exchange Board of India (SEBI).

The top ten losers among the large cap funds are: Quant Large Cap Fund (-8.46 percent); Bank of India Blue Chip Fund (-8.34 percent); JM Large Cap Fund (-5.93 percent); ITI Large Cap Fund (-4.11 percent); Groww Large Cap Fund (-3.36 percent); Union Largecap Fund (-2.91 percent); Taurus Large Cap Fund (-2.20 percent); PGIM India Large Cap Fund (-0.86 percent); HSBC Large Cap Fund (-0.44 percent); and Sundaram Large Cap Fund (-0.16 percent). This clearly shows the nature of recent market corrections.

The onus can’t be on the investors alone to ‘read all scheme related documents carefully’ before investment. What are the MF operators supposed to do? Aren’t they also required to see and analyse the market situation carefully before launching a scheme? Aren’t they taking advantage of the artificial stock boom to dupe ordinary investors? Ironically, the SEBI remains a silent spectator while fund operators have a field day taking advantage of the unsustainable market boom to rob investors. Under an artificial market boom situation, the risk factors for all funds, including large-cap, remain high although large-cap funds normally provide some kind of stability compared to small-cap and mid-cap funds.

The equity market, which generally offers the best return opportunity among all other investment options in the long run, is also hit hard when the market crashes. For instance, the BSE 500 index dropped 13 percent in dollar terms in 2025. Valuations have fallen. MF investments are posing major challenges due to the expected market volatility, miss-selling and greedy or unscrupulous fund operators. Investors alone can’t be blamed for being unaware of the fact that their investments can experience losses.

There is no risk-free investment except probably in government bonds. But aren't those fund operators also required to assess the market carefully before launching NFOs? Negative returns can occur not only due to unforeseen economic downturns and market volatility, but also for poor fund management. AMCs are supposed to decide on a scheme based on inputs from chief investment officer (CIO) on investment objectives that would benefit investors, and inputs from chief marketing officer (CMO) on what should be a marketable theme for MF investors. Few will disagree that CIOs and CMOs did not provide the right advice to those AMCs.

AMCs even failed to notice how badly were some of the high-premium initial public offerings (IPOs) by companies faring in the market. A significant portion of Indian IPOs, including those with high premiums, are currently trading well below their initial issue prices, with around 40 percent of mainboard IPOs and 50 percent of Qualified Institutional Placements (QIPs) trading below their issue prices. They were clearly overvalued. And, this happened right under the nose of the SEBI.

The market regulator’s key functions revolve around investor protection, market development, and regulation, encompassing activities like safeguarding investor interests, promoting fair practices, and ensuring the efficient functioning of the securities market. It appears that the SEBI has failed in all these key functions, indirectly impacting the investors’ trust in mutual funds, which are supposed to perform better than most other sources of investments. In fact, if one takes into account the long-term performance of the entire mutual fund universe, covering more than 22,000 funds in total and individual share classes in India, posted an average gross return of 10 percent last year. High performers went even well beyond that. (IPA Service)