Say No to Mutual Fund NFOs

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Suddenly, some mutual fund advisors are in love with New Fund Offers or NFOs. A mutual fund house comes up with a New Fund Offer to launch a new scheme. Most mutual fund advisors do not encourage investing in new schemes because they do not have a performance record.

Advisors argue that it is better to invest in a scheme with a consistent performance record in the same category rather than betting on an unknown entity. Advisors make an exception only when an NFO offers something 'unique' that is not available in the market.

  

So, what has changed? Why are some advisors smitten by NFOs these days? Are advisors recommending NFOs because they are offering something 'unique' or they have something that is not available in the market? The answer is no

Some advisors are pushing plain vanilla equity schemes for reasons better known to them. Sometimes, they tell their clients that the scheme would do well because it is from a great mutual fund house. They also recommend some schemes because they are managed by star fund managers. Mostly, they claim (wrongly) that the NFO theme is going to be flavour of the market in the coming days. It really doesn't matter whether the NFO is a largecap offering or a tax savings scheme.

  

My guess is that people are coming with certain theories because the market is at an all-time high, Trendy Investments. Otherwise, there is no reason to recommend new schemes when you already have established schemes available in the same category

There are many financial advisors who frown upon the new-found love for NFOs among their counterparts. They say that some of these advisors were pushing closed-ended NFOs to their clients with the promise of higher returns, whereas the real reason could be extra commissions for them.

How can you push an NFO when there are established players in the same category. We do not recommend IPOs and NFOs

Critics allege that mutual funds are offering extra incentives to their sales force to push their NFOs. However, they are quick to add that they have no proof to back up their claims, except for the fact that NFOs may offer slightly higher commission to distributors. Some others believe that advisors are trying to cash in on the bullish IPO market, where novices throng for listing gains. They say some investors still subscribe to the bogus theory that investing in a scheme

with a Net Asset Value of Rs 10 is better.
  

To sum up, you should avoid NFOs unless they offer something unique. It is always better to invest in a scheme with a proven track record. Sure, the past performance may not be repeated. But the consistent performance of a scheme during different market cycles give you a lot of comfort.   

Here are a few quick pointers that would help you to corner your mutual fund advisors. Whenever your advisor tries to sell you an NFO on the pretext of some new theory, you may try these counterarguments.

Claim: The fund house is great
Counter claim: There are many great fund houses in the market.

Claim: The fund manager is great
Counter claim: There are many great fund managers in the market.

Claim: ELSS scheme is great for tax planning.
Counter claim: I know that, but there are many established ELSSs available in the market.

Claim: Largecap/midcap/smallcap/multicap schemes are going to do well in the coming days.   

Counter claim: Okay, but is it necessary to invest in a new largecap/midcap/smallcap/multicap scheme when there are many established schemes in the respective category available in the market.

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