Avoid similar NFOs

Unless the mandate is widely different from the schemes you own, it makes little sense to invest in these

Finally, retail investors are seeing some action in the stock market. With the BSE Sensex at about 22,500, many are sitting on gains in their portfolios. Mutual fund houses are trying to attract these investors with new fund offerings (NFOs) in equities. Between January and May, fund houses launched 22 NFOs, the highest since 2010. By comparison, fund houses launched a total of 18 schemes in 2013 and only eight in 2012.

While the launches might reflect the renewed interest of fund houses, the question is should you invest in these? Gaurav Roy, co-founder and chief financial officer, Bigdecisions, feels reasons to invest in an NFO should be compelling. “For instance, if the fund is investing into an asset class or a market or sector in which you don’t have exposure, or if there is a completing new category,” he says.

From the perspective of a fund house, new launches could be targeted towards sectors in which it does not have presence, says Tanwir Alam, founder and managing director of Fincart, adding the selling point of distributors would remain the ‘NFOs-are-cheaper’ pitch. But investors, he adds, should not fall for it.

The fact that a large number of NFOs are being launched also means investors will have more options, as many equity funds are already present in that segment.

The risk the fund is taking is important. So, investors should also consider the fund’s risk-reward ratio. Of the six NFOs launched in April-May, three are equity mid- and small-cap, two are international equity and one is a multi-asset fund. Already, there are 54 equity mid- and small-cap funds and 38 international funds.

So, why should an investor look at current NFOs? “In the past, NFOs have been launched to capture the flavour of the season—-information technology funds in late 90s and infrastructure funds five years ago are good examples. But why will you choose to invest in a new fund with a similar mandate and objective over an existing fund with a good track record?” Roy asks.

Raghav Iyengar, executive vice-president, ICICI Prudential AMC, says investors shouldn’t simply avoid an NFO because it doesn’t have a good track record. “Look at the pedigree of the fund house, its investment philosophy and the track record of other schemes. Also, look at the experience and background of the fund management team that will manage the scheme,” he says.

The Securities and Exchange Board of India’s mandate of seed capital should provide some comfort to investors. According to this norm, at least one per cent of the total investment in each fund must come from the fund house, subject to up to Rs 50 lakh. This norm, applicable to all open-ended funds, will ensure the fund house has its own money invested in all schemes at any given point of time, Alam says.  “Retail investors should go with the track record and consistency of the fund manager. While the performance of the fund is important, if the manager is consistent during good and bad market conditions, I will prefer to remain with that fund,” he adds.