Avoid NFOs unless the idea is unique

Once invested, give the fund at least three quarters to perform

Although equity markets have been choppy in the past few months, mutual fund houses are upbeat. They have filed about 100 equity new fund offering (NFO) prospectuses with the Securities and Exchange Board of India (Sebi). This number is substantially higher than the 75 NFOs that were launched in 2014.

While the launch of NFOs is a good sign from an investor’s perspective, because it reflects the positive outlook about the stock market amid seasoned fund managers, investors need to ask tough questions before investing in these. For example, what does this NFO add to my portfolio? As Hemant Rustagi, CEO of WiseInvest Advisors, puts it: “Unless the NFO offers something which is not available with other funds, I don’t see great merit in investing in these. Even if the idea is new, you have to assess its suitability with respect to your overall portfolio.”

One of the popular marketing pitches for investing in an NFO is that it is cheaper. That is, while existing funds are quoting at a net asset value of, say, Rs 100, the NFO will come at only Rs 10. This means, the number of units that you would be able to get for Rs 1,000 would be only 10 in the case of an existing fund (net asset value or NAV = Rs 100). In comparison, investing in the NFO will get you 100 units (NAV = Rs 10). But this argument is fallacious because even if the growth is 10 per cent for both the schemes over the next year, the investment value will rise to Rs 1,100 only. The number of units, in other words, does not make much of a difference. Also, an existing fund has a track record.

Even if you want to invest, ask yourself whether it is a new theme. For example, US feeder funds were a unique offering when they hit the market in 2012, offering investors a chance to diversify their portfolio. Last year, a clutch of equity income hybrid funds entered the market, with investment in equity and debt, and a certain portion utilised for equity arbitrage. “Even if it's a new idea, avoid the scheme if you can't understand the fund theme or strategy,” said Vidya Bala, head of mutual fund research at Fundsindia.com.

According to Manoj Nagpal, CEO of Outlook Asia Capital, it is better to avoid NFOs because unless it is a diversified offering, the fund manager has a good track record and is handling such a fund for the first time. A lot of the new offerings are expected to be centred around the 'Make in India' theme.

Experts say it is better to avoid these funds altogether as they might be opportunistic in nature. “Historically, thematic or sectoral funds have not done well as most of them get the timing of the launch wrong. Even today, while the NAVs of about 80 diversified equity schemes are trading near all-time highs, most of the sectoral and thematic funds are 10-20 per cent away from their highs,” said Nagpal. Between open-ended and closed-ended NFOs, experts believe it is better to stick to the former as the latter do not offer an exit option in case the market tanks.

Once invested, don’t be in a rush to exit. Give the fund at least a few quarters before taking the call.