An NFO doesn't come any cheaper than an existing fund. Invest in an NFO only if it adds value to your portfolio
IT'S raining new fund offers (NFOs) in the mutual fund industry. According to Value Research, an independent mutual fund tracking firm, more than 200 NFOs have managed to mobilise 43,251 crore in the past five months. The fund houses launched NFOs across the spectrum, including 14 equity funds, 20 debt funds, 2 gold funds, 15 hybrid funds while fixed maturity plans or FMPs make up the rest. The corresponding figure for the last year was 100 schemes which managed to mop up around 14,077 crore. In short, there is no denying the abundance of NFOs in the MF industry. However, all NFOs are not great money-making opportunities for retail investors. Not long ago, CB Bhave, chairman of market regulator, Securities and Exchange Board of India (Sebi), chided the MF industry for launching schemes with little distinction and making the selection process difficult for the average investor.
Before You Commit...
The key question that an investor should ask when looking at an NFO is: Should I invest? According to financial experts, you should invest in a product only if you actually need it. For example, if you want to create wealth over a long period of time, then you can consider investing in various equity schemes. Similarly, if you are looking for a regular income, you should invest in fixed income instruments. In short, do not fall for the advertising campaigns or the 'availability syndrome' where an individual opts for something that is available to him thinking that the available option is the best solution for his needs.
Just grab the offer document and read it. This will help you figure out the investment objective of the scheme. If the objective matches your financial goal, you can consider investing in it. If the investment theme of the new fund is not going to add any value to your portfolio, there is no incentive for you to invest in the new fund offer. Of course, you can consider NFOs that offer something unique. In all other cases, it is better to invest in old schemes with a performance record.
Bust The Cheap NFO Myth
It is incredible that a small minority of MF investors still falls for this sales pitch. Often, MF advisors pitch NFOs as cheap vis-à-vis the funds that are already available in the market. But that is not the case. A fund with an NAV of 10 has the same opportunity of making or losing money as its counterpart with an NAV of 100. For example, you decide to invest 1 lakh each in two funds – a fund with an NAV of 10 and another with 100. In the 'cheap' fund you will get 10,000 units while the other one will bring only 1,000 units. And the funds deliver identical returns of 20% in sync with broad market returns when you decide to exit. The first fund's NAV now stands at 12 whereas the second fund NAV quotes at 120. Multiply these numbers with the units you hold and you will see both the schemes giving back 1.2 lakh each.
The bottomline: An NFO doesn't come any cheaper than an existing fund. But the high NAV speaks volumes about the past performance of the existing fund.
IPO Versus NFO
Some investors confuse NFOs with an initial public offering (IPO) of shares. An important difference between the two is how the NAV and stock price is calculated. The NAV of a fund is arrived at by finding out the value of the investments in the portfolio. The NAV is a reality. The stock price, however, largely reflects the market perception about the stock and may discount the future growth of the company. Hence, the stock, on listing, may quote at a substantially higher or lower price than that of the IPO price. But a new fund's NAV may not rise or fall much.
Going On Record
This is where an existing scheme scores over a new fund. Most expert advisors are sceptical about new funds. It is better to invest in an existing fund with a good track record. It saves you from the difficult task of guessing if the new fund will deliver in future. An existing fund not only has a returns' history but also gives you an idea of the costs associated and the risk-reward proposition it has offered to investors. If you are keen to invest in a new fund offer that promises something unique, it is better to have an investment horizon of at least three years.
The track record of the fund house is also an important factor to look at. Stability of the fund management team and process-driven investment approach ensure that the schemes offer consistent performance. Sound risk-management practices have ensured that the investors are not exposed to undue risks. This is especially true in case of closed-ended schemes such as FMPs and capital protection-oriented schemes where NFOs are the only way to invest.
The track record of the fund house to manage such schemes is a more important determinant than the expected returns while deciding whether you should invest in them.
Weigh The Cost Factor
While looking at a new fund, do spend some time understanding the costs associated with it. Sometimes, the fund structures inflate the costs. If you are considering a Fund of Funds (FoF), better look at the costs incurred by the underlying funds in which the new fund invests in. Though there is no entry load on mutual fund investments, exit loads are in place. It's wiser to factor in the cost of an early exit before you commit your money. Given the lack of cost history, factor that in at the higher end – say 2.5% — for actively-managed equity funds.
Finally, don't chase NFOs in search of better returns. You can safely let go of a majority of them. Chances are that you will find schemes with better long-term performance record to invest. You can make an exception for an NFO that offers you a chance to invest in a new asset class. For example, a silver ETF or a real estate ETF. Only in such instances should you consider investing in an NFO.
1 Understand your financial goals before investing
2 Read the offer document of NFO to know the investment objective
3 Choose a fund with a track record over a new fund offer
4 A unit available at par (10) is not cheap compared to the high NAV of an old fund
5 Before investing in a close ended fund, check if you can stay put for the entire term
6 Consider the cost involved before liquidating a fund holding to invest in an NFO
