Don't invest in similar NFOs

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

The mutual fund industry is seeing some activity after a long lull. Between November 2013 and March 2014 there have been 24 equity New Found Offering (NFOs) which have together raised almost Rs 3,000 crore. Between April and May alone six fund houses have launched NFOs. Do NFOs offer good value to investors or are MFs trying to take advantage of the rally in the equity market?  

According to Gaurav Roy, co-founder and COO, Bigdecisions.in while mutual funds may be trying to cash in on the current upswing in the markets, retail investors should have compelling reasons for investing in a specific NFO,.

"Retail investors should invest in NFOs only when there is a compelling reason for it. For instance, if the fund is investing into an asset class or a market or sector that you haven't yet invested in, or if you trust the fund house and it is launching a fund in a category where it does not have existing schemes,'' he says.

For instance, some investors may trust only large funds or some may trust funds that are large internationally but may be small in India.

Some of the fund houses maybe trying to take advantage of the bull market and launch schemes in categories where they don't have presence, says Tanwir Alam, Founder and MD of Fincart.

"Over the last two to three years there has been no bumper NFOs because no new set of investors have come in. Many people still believe that an NFO is cheaper because the units are available at Rs 10. They think it is similar to getting stocks at par. But that is not the case,'' he says.

With more number of funds being launched, it becomes a problem to weed out non-performing funds. Not just returns, but the risk the fund is taking is equally important. So, investors should also look at the risk-reward ratio of the funds.

For instance, out of the six NFOs launched over April-May, three are equity mid and small-cap, two are international equity and one is a multi-asset fund. But there are already 54 equity mid and small-cap and 38 international funds. So, why should investor look at the current crop of NFOs?

"In the past NFOs have been launched to capture the flavour of the season. But why would 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.

However, according to Raghav Iyengar, Executive Vice-President, ICICI Prudential AMC, investors should not simply avoid an NFO because it lacks track record. "Look at the pedigree of the fund house, their investment philosophy and track record of other schemes. Also look at the experience and background of the fund management team that would manage the scheme,'' he says.

Sebi's rule of seed capital should provide some comfort to investors. As per this rule, at least 1 per cent of the total investment in each fund must come from the fund house itself, subject to a maximum of Rs 50 lakh. This applies to all open-ended funds and will ensure that the fund house has its own money invested in all schemes at any given point of time, Alam says.

"Retail investors should go with track record and consistency of the fund manager. While the performance of the fund is important, if the fund manager is consistent during good and bad market conditions, I would prefer to remain with that fund,'' he adds.