Check the new mutual fund scheme’s investment thesis, asset allocation strategy, stock selection rationale and the track record of the fund house and the fund manager before investing in it
A New Fund Offer (NFO) document is issued by an asset management company when it is offering investors a new mutual fund scheme. In financial year 2020-21, almost 88 NFOs were launched by various fund houses, which is 75% higher than the last 10-year average launch per year.
NFO documents average between 100 and 150 pages. Reading them in depth is a time-consuming process. Let us discuss how an NFO is different from Initial Public Offer (IPO), what are the critical aspects that one should look for in such a document before investing in the NFO.
NFO vs IPO
Often investors are confused between NFO documents and IPO prospectus. IPO document is issued by a company for raising funds and it consists of information such as objective and utilisation of funds, financial risk of investing, projected financial statements, key managerial employees, etc. But, NFO documents consist of Scheme of Information Document (SID) and Statement of Additional Information (SAI). The SID provides information such as investment objective, asset allocation pattern, investment strategy, profile of the fund manager, benchmark index, etc. SAI exhibits all the statutory and other information pertaining to the AMC.
Investment thesis of the scheme
It is very important to read this part of the document to know the investment objectives of the scheme. This information could be obtained from the SID, where the mutual fund states what it aims to achieve in terms of returns and how they plan to achieve the same. Here, they indicate how the scheme plans to allocate its assets; like, whether it is an equity-oriented scheme or predominantly invests in debt and money market instruments or follows a hybrid approach.
Asset allocation strategy
Investors need to pay attention to this section as the mutual fund scheme shows its proposed asset allocation strategy among the various asset classes such as equity, debt, commodities, REITs, etc. Generally, it provide a range of allocation showing the minimum and maximum exposure across various asset classes. In fact, this part will help investors to assess whether their risk profile matches with that of a mutual fund scheme.
Stock selection rationale
This is another crucial part of the document. In this section, the mutual fund scheme states the rationale behind securities / stock selection. The scheme also discloses its approach towards stock selection; namely, top-down approach or bottom-up approach or fundamental or technical approach or a combination of all. Apart from the rationale, this part of the document shows the scheme’s philosophy of investment. For instance, a scheme could follow value investing or growth investing or combination of both. Thus, this section shows the investment process and systems in detail.
The track record and market reputation of the fund house are important factors to consider. This can be observed by checking how long the fund house has been in existence, how many mutual fund schemes it currently offers and the performance of such schemes. An established fund house which has a better track record is always more preferable. Similarly, it is prudent to check the track record of a fund manager by checking the performance of the schemes currently managed or were managed in the past by him, or his work experience in the mutual fund industry, etc. The fund manager is the person who actually manages money invested in the scheme.
To conclude, as an investor one should read at least the above pointers to have a better understanding of the mutual fund scheme and the fund house before investing in the new schemes.
The writer is a professor of finance & accounting, IIM Tiruchirappalli
DECODING the NFO
NFO documents consist of Scheme of Information Document (SID) and Statement of Additional Information (SAI)
SID provides information such as investment objective, asset allocation pattern, investment strategy, profile of the fund manager, benchmark index, etc
SAI exhibits all the statutory and other information pertaining to the AMC