Don't redeem investments in new funds before one year

In an open-ended fund, investors should wait for a year, evaluate the performance and then take a call

Buoyed by the success of recent launches, mutual fund companies have applied for as many as 25 new fund offers (NFOs) with the markets regulator, Securities and Exchange Board of India (Sebi). And, retail investors continue to pour money in these schemes, though they shouldn’t.

“Investors still believe that a net asset value (NAV) of Rs 10 of a new fund means it is cheaper than existing schemes that have higher NAVs, which is incorrect. Mutual fund units don’t work like stocks,” said Rajiv Shastri, MD & CEO, Peerless Mutual Fund.

But if you have invested in a recently launched scheme, how do you go about tracking it? In a closed-end fund, the person does not have an exit option. In an open-ended fund, however, it makes sense if investors wait for a year and evaluate the scheme’s performance and then take a call.

“Only after a year, can a person gauge the performance of a scheme,” said Vidya Bala, head - mutual funds research, FundsIndia. She said an investor first needs to check after three months whether the fund is fully invested or is yet to deploy the money. Ideally, large-cap and equity diversified schemes utilise the money in six weeks to two months. For thematic or small-cap funds, it takes between two and three months, as the universe of such stocks are limited, and investments need to be done in a phased manner.

If a large part (above 20 per cent) of the corpus is still in cash, the fund manager is either finding it hard to find successful bets or could be timing the market.

In six months, the new fund should be able to give returns at par with the benchmark or beat it. And, after a year, it should be able to also perform better than the category average.

“If it’s a mid-cap fund, investors may have to give it more time before forming an opinion,” said Pankaj Murarka,  of Axis Mutual Fund. Evaluate the performance for another quarter before taking a call.

While returns are one parameter, investors should also check the portfolio, especially in schemes that are based on themes and mid-cap funds. Many investors are surprised when they see the portfolio and find stocks that do not conform to the theme or see a large-cap company in a mid-cap fund.

For liquidity, stability, and other reasons, such schemes invest as much as 30 per cent in large caps. And they do mention these details upfront in the scheme information document. However, if they go beyond the specified limit that means the fund manager is not sticking to the mandate.

If the fund has strayed from its stated strategy and still delivered reasonable returns, you can afford to stick to it for another two quarters and watch the performance. If it’s lagging the benchmark by at least five percentage points or is giving returns that are 10 percentage lower than its peers, it could be the time for the investor to move on.