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NFOs: not the best way to invest

Amar Pandit 

Record shows very few are unique or fit your aims.

The Securities and Exchange Board of India (Sebi) has started coming down hard on new fund offers or NFOs of mutual funds. Reason: There is duplication of themes quite often or as they say – an old wine in a new bottle.

In the past, many fund houses have made promises that sound innovative to the ear, but in reality, is just another name of some old scheme. For instance, there are smart one-liners such as ‘All the four regions of the country working for you’ or ‘Invest in Special Situations’ or ‘Invest in India’s true potential’.

It’s as if existing schemes did not tap into India’s true potential. Also, it is beyond anybody’s comprehension that how an investment strategy by selecting companies from different regions can generate superior returns or can complement a portfolio. Between 2005 and 2007, NFO were a rage. The rat race for becoming the top fund house in the country was pushing them to launch new schemes regularly. But in reality, many of them were just repackaging of some of their existing schemes.

Some asset management companies (AMCs) do launch products to complete their portfolio, as with a fund house with no mid-cap or balanced fund launching one. However, hardly any effort was made by the fund industry to educate investors. Instead, most of the focus was on increasing the Assets Under Management (AUM) on the basis of collection in NFOs.

In sum, most of this noise was nothing but financial jugglery. Additionally, a lot of investors believed that Rs10 net asset value (NAV) was cheaper and better than an existing scheme, which has a NAV of Rs 400.

Many distributors played on this lack of understanding demonstrated by investors and churned portfolios excessively.

Sebi was very slow to react initially to these issues plaguing the industry but, thankfully, came out with a regulation in early 2008 to clamp on the amortisation of the initial issue expenses charged by Asset Management companies.

This move brought closed-ended schemes at par with open-ended ones and the number of NFOs fell significantly. The other reason was that equity markets were not very kind in 2008 and the early part of 2009. However, with the markets going up and new fund houses coming on board, there are likely to be a lot of NFO launches in the future.

However, Sebi is again taking a lot of active interest to curb malpractices on this front. The regulator will be scrutinising every NFO that will be launched to see if it is actually a new offering.

Besides, the regulator wants the funds’ trustees to play an active role, and be more accountable for the money their asset management company is entrusted with. In 2006, Sebi issued revised regulations, making it mandatory for the board of trustees of AMCs to affirm that the NFO is distinct from their existing schemes.

It seemed very few trustees took this seriously, as one saw frivolous NFOs being launched even after this diktat came in. However, Sebi is in no mood to relent: they’ve once again stressed the need for every new scheme to be independently verified by the trustees as being actually distinct.

So, what should one do is the question facing investors today. Should one go for an NFO? The answer, when it comes to equity-oriented funds, is a simple NO. There is no reason to go in for a new fund unless it presents something unique that can complement your existing portfolio or brings a different asset class in the picture.

When a fund that invested in gold mining companies was launched in 2007, there was no other offering exposure to these companies. This is an example of an actually unique offering. However, most NFOs will just be me-too schemes. Hence, investors must ask the following questions:

 

 

 

  • What is the investment strategy and investment objective of this scheme? 
     
  • How is it different from the existing schemes on offer? 
     
  • Do I already have such in my portfolio? 
     
  • Is this investment relevant for my goals, given my time horizon, risk-taking capacity and return expectations? 
     
  • Can my goals be achieved by existing schemes?

    Basically, one needs to understands that one’s goals and objectives are key and nothing should supersede them. Also, make sure you have a firm investment policy in place, one that clearly spells out which product to buy for each goal, why to buy, when to buy and when to sell. Finally, say No to all those newsletters, insights and new ideas.

    The writer is director, My Financial Advisor

     

     

     

  • First Published: Sun, November 01 2009. 00:56 IST
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