Mutual Funds: Should you invest in a new fund offer?

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October 12, 2020 12:15 AM

Consider investing in an NFO only if it will invest in an entirely new category or sector or geography, thus offering an unique opportunity to invest that does not exist in current products

Even after investing in an NFO, review the performance of the fund regularly and monitor whether the fund is able to generate alpha over its benchmark.

At a time when returns from most equity-oriented mutual funds have been disappointing and market valuations are stretched, fund houses are launching open-ended new fund offers (NFOs) to grow their assets under management. Since January this year, mutual fund houses have mopped up Rs 39,121 crore from 39 open-ended NFOs.

Like initial public offers (IPOs) in direct stocks, asset management companies (AMCs) launch NFOs to raise money from investors to invest in markets. Many of the recent NFOs are sectorial/thematic category, international equities, exchange traded funds, multi-asset themes as AMCs seek to take advantage of growth potential in these sectors/categories.

Investors buy the units of the scheme at the fixed rate of Rs 10 per unit. After the NFO window closes, the schemes are available for continuous sale and repurchase at the current day’s net asset value (NAV).

Like IPOs, most of the NFOs come during a surging market and it is more to do with the sentiments of the investors during rising markets. Harshad Chetanwala, co-founder, MyWealthGrowth, says, investors are more confident in investing during these times and hence AMCs feel they can capitalise on this optimism.

What to look out for before investing in NFO
Before investing in an NFO, an investor should look at the unique investment style and theme that it is being offered by the fund house. 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.

Investors must analyse if the NFO is just cashing on a particular theme which is in vogue at present and the theme is not sustainable in the long run. They should avoid such funds. Investors must also look at the track record in other schemes of the fund house. Most importantly, investors must analyse their risk profile and liquidity needs before investing in an NFO.

MyWealthGrowth’s Chetanwala says investing in any fund should be based on the needs and profile of investors. “Usually, it is better to invest in an on-going fund instead of NFO unless the new fund offers an unique opportunity to invest that does not exist in current products,” he says.

Similarly, Brijesh Damodaran, founder and managing partner, BellWether Advisors LLP, says if the NFO will invest in n entirely new category or sector or geography, then investors can consider investing in it. “This should be an entirely new and there should not be any other prevailing scheme. And this year, two such NFOs caught attention—S&P 500 scheme (targeting US stocks in S&P 500) and a healthcare index fund,” he says.

Better to invest in existing schemes
While investing in NFOs may look attractive, experts suggest one should ideally invest in existing schemes as the investing style, assets under management, portfolio and past returns are known to the investors. “It is always better to give that investment cheque to someone who has a proven track record instead of a new fund. You always look at multiple parameters about the fund including the past performance and portfolio characteristics before investing in it.

With these inputs not available for the new fund, it is better to invest in the existing fund,” says Chetanwala.
An existing fund which has seen bull and bear market cycles will be better placed to give higher returns in the long run. Damodaran says, investors should typically stick to schemes with track records of two-three years. “And only if the NFO is totally unique in terms of its offerings and if not currently available, then they should do proper due diligence and then invest,” he suggests.

Avoid investing in an NFO through systematic investment plan route. Investing for a long time should be based on the track record of the scheme. Even after investing in an NFO, review the performance of the fund regularly and monitor whether the fund is able to generate alpha over its benchmark.

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