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Avoid NFOs

 

Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.

 

For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs. While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter.

Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock exchanges, exercising the exit option for retail investors is not easy as the funds, often bought from distributors, are not held in demat form. You could be forced to redeem your investment in a closed-end equity fund when the markets are down.

Moreover, most NFOs are launched during bull runs when valuations are high. The probability of enduring a loss is higher. There is also a notion among investors--which unscrupulous agents promote--that an NFO, which comes at a net asset value (NAV) of `10, is cheap. If the NAV of an existing fund is higher, it only means that the fund has been around for a while and has gained in value. Do not fall prey to the notion that the `10 NAV means the fund is cheap.

Only under special circumstances should you consider investing in a NFO. For instance, if it's an international fund-of-funds, where you have the track record of the parent fund to go by. Or, when an NFO's investment objective is unique, for example, in 2012, the launch of US-focused funds gave Indian investors the opportunity to invest in the US market.

So, unless there is a very good reason to opt for a NFO, it is best to stay away from them.

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