1. Mutual funds: Should you invest in a new fund offer? What you must know

Mutual funds: Should you invest in a new fund offer? What you must know

With the equity markets on a rise, asset management companies (AMCs) are launching new fund offers (NFOs).

By: | Published: July 4, 2017 6:12 AM
These funds include both open-end and closed-end schemes for equity, debt, balanced and fixed maturity plans (FMPs).

With the equity markets on a rise, asset management companies (AMCs) are launching new fund offers (NFOs). Between January and May this year, mutual fund houses launched 146 new schemes and collected Rs 27,456 crore. During the same period last year, fund houses had launched 143 new schemes and raised Rs 21,720 crore. These funds include both open-end and closed-end schemes for equity, debt, balanced and fixed maturity plans (FMPs). However, with growing interest of retail investors in equities, many of the NFOs are open-end equity and equity-related securities. Investors can subscribe to closed-end funds during the offer period and for an open-end fund, one can invest anytime even after the listing. Closed-end funds come with a fixed tenor and investors cannot exit before the maturity period.

What are NFOs?

In order to raise money from the public to invest in stocks or bonds, mutual fund companies come out with NFOs, which is the first time subscription offer for a new scheme. These schemes are built around themes such as capital protection, equity opportunities, economic recovery, infrastructure, growth, etc. Usually, the minimum amount of investment is `5,000 and each NFO will state its investment objective. Investors buy the units of the scheme at the fixed rate of Rs 10 per unit.

Fund houses have to take the approval from markets regulator Securities and Exchange Board of India (Sebi) before launching an NFO. While many investors invest in an NFO because its net-asset value (NAV) is priced at Rs 10 per unit, as compared to open-end schemes with higher NAVs, analysts say investors must carefully look at all the factors before subscribing to NFOs.

Rather, they suggest investing in existing schemes as the investing style, assets under management, portfolio and past returns are known to the investors. Brijesh Damodaran, managing partner of BellWether Advisors LLP says most of the NFOs are with a lock-in period of around three years. “So, investors looking at the past fund manager performance of similar nature of schemes and aware of the risk, return and reward can allocate a part of the tactical portfolio.”

Look before you leap

Before investing in an NFO, an investor should look at the unique investment style and theme that it is offering and which is not there in the existing schemes in the market. They should look at whether the NFO is just riding on a particular theme which is in vogue now and is not sustainable in the long run. Moreover, investors look at the fund house, the fund manager with track record in other schemes and the mutual fund sponsor’s past record of mopping up funds in previous NFOs.

Analysts say a new scheme which outlines its investment process clearly should be considered. However, if the scheme deviates from it, investors should see that as an indication of weakness in investing style. Damodaran says the performance records across both open-end and closed-end schemes are easily available and both speak. “Allocation is again purely dependent on the risk profile, liquidity needs, risk-reward ratio. A close-end fund gives the fund manager certainty of funds for a pre-determined period, and allows him to take concentrated calls,” he underlines.

If an investor has invested in an NFO, then it is better to do a quarterly review of the scheme, especially in the initial years. Otherwise, if an investor has invested in funds with a good track record, then an annual review comparing the fund with the benchmark and with category peers will be ideal. Analysts say if a retail investor is not too convinced about an NFO, then it is better to invest in an existing plain vanilla equity diversified fund. In fact, a fund which has seen bull and bear market cycles will be better placed to give higher long-term returns.

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