Don't invest blindly in NFOs even if fund houses get under the skin

If they fill any gap in the portfolio, go for them. Otherwise, avoiding may make sense

With a number of fund houses launching new fund offers (NFOs), many investors will get emails and calls from distributors to invest in these schemes. There would be different sales pitches to attract them.

At present, Edelweiss US Technology Equity Fund of Fund, Sundaram Balanced Advantage Fund, Tata Multi Asset Opportunities Fund, and close-ended ICICI Prudential Fixed Maturity Plan (FMP) - Series 87 - 1156 Days Plan D are open for subscription.

For a mutual fund (MF) house, a new scheme that covers new areas is important because it adds to its bouquet of products.

However, before investing in any NFO, investors should ask about the value addition a scheme will bring to their portfolio. Some of the key things to watch out for:

Track record

Though past performance may not predict future showing, the importance of track record cannot be ignored when it comes to investing. Deepali Sen, founder partner, Srujan Financial Advisers LLP, says: “Existing open-ended funds have several years of track record. An NFO has no track record; there’s no past performance to review.”

It is like taking a chance whether the scheme will do well or not. Remember, just because the fund house’s other scheme has done well, it doesn’t mean NFO too will do well.

Objective

Every scheme comes with an investment objective or mandate. For instance, Edelweiss MF has launched the Edelweiss US Technology Equity Fund of Fund. The objective of this fund is to provide access to emerging technologies, which are in early stages of adoption based in the US — Synopsys, Tesla, Advanced Micro Devices, Analog Devices, ServiceNow, to name a few.

Another example is Tata Multi Asset Opportunities Fund, which will invest broadly in three asset classes — equity, exchange-traded commodity derivatives, and debt.

Says Swapnil Kendhe, founder of VivekTaru, “Before investing in an NFO, always consider if the fund’s positioning fits into your financial plan or asset allocation. Unless the NFO has something unique to offer and also finds a place in your financial plan, you should avoid investing in an NFO.”

Type

Is it a close-ended or open-ended scheme? Remember, around February and March every year, many fund houses launch FMPs of 13-15 months due to the tax advantage they give. By launching FMPs towards the fag end of the financial year, fund houses help investors claim inflation indexation benefit for one extra year.

Also, the actual performance you earn will be very close to the indicative yield on the FMP. While many financial advisors stay away from NFOs, they do recommend close-ended FMPs for those investors who prefer not to have too much volatility in returns.

Says Kendhe: “Retail investors who cannot track their investments regularly should choose a passive investing strategy and stick to index funds. Choose Nifty50 and Nifty Next funds and invest the invisible corpus in the ratio of 80:20. If you are looking at active funds, always go for existing schemes like a multi-cap fund with proven track record.”

Remember, even if there’s a unique offering, a retail investor may not be able to analyse it. Adds Sen, “See if the NFO fills any specific gap in your portfolio. Otherwise, retail investors should simply avoid NFOs.”