When stock markets rise, it’s not just the IPOs that come in quick succession. Even the mutual fund houses or AMCs want a slice of the pie and launch new offerings (NFOs or New Fund Offers). And this is what is being happening these days.
Most fund houses launch their NFOs with a lot of buzz and fanfare. Like it’s a once-in-a-lifetime opportunity based on some new opportunity that wasn’t available earlier. But buyers beware. You can’t blindly believe what is being pitched to you. You might be socially engineered by these promotion campaigns and tempted to take a look at the NFO. But wait. Don’t be in a hurry.
I keep getting questions about whether it makes sense to invest in these NFOs of mutual funds. In this article, I will try to discuss whether should you consider NFOs of mutual funds or not.
But before we get to the real discussion, I must talk a bit about people’s attraction towards NFOs and their focus on investing at Rs 10 NAV in NFO being cheap and profitable.
I want to make it very clear that just because an NFO comes at an NAV of Rs 10 doesn’t mean that the fund is cheap. It is just a pre-decided mathematical number used to define the starting NAV of the fund. That’s it. And this is why NAV of Mutual Funds starts with Rs 10 during NFO. Nothing else to explain here. Investors should avoid investing in NFO merely because the NAV starts at Rs 10. Sadly, many times mutual fund distributors mis-sell by using this very flawed logic. So this Rs 10 attraction should be dumped.
If you are investing in an NFO just because of its low Rs 10 NAV, then that is not the right reason to invest in an NFO (as we will discuss shortly).
So what should you consider when evaluating any new fund offering or NFO?
Here are few pointers to ponder over and judge the new offering on:
- For NFOs, there is no past data available to evaluate, unlike existing mutual funds. Right? And you really can’t predict future performance. It might appeal to common sense that when you want to hand over your hard-earned money to a fund manager to manage, it makes sense to have some track record to base your decision on.
- There are thousands of funds out there (1729 at last count). So you need to decide that what is unique about this new NFO that was missed by thousands of other funds. You need to ask if the NFO is any different from any of the other existing MF schemes that are already available at that moment. If the NFO fund is neither unique nor different from what’s already available and there are established funds doing the same thing with a reliable track record, then does it even make sense to consider that NFO? Think about it.
- So one thumb rule (if you wish to call it that) is that if there are existing and similar alternatives available for the NFO, then you are better off picking from the existing options. But if there are no alternatives to the NFO and NFO’s unique mandate/approach has got you interested, then you can evaluate the NFO and if need be, invest in it.
- Now, this is important. Do you really need a new fund in your portfolio? You might already have a few schemes in your mutual fund portfolio. So chances are that your MF portfolio is already sufficiently diversified. Adding an extra fund may not make much of a difference. So investing in a new NFO might not benefit you and instead, just increase the clutter in your portfolio.
- Many people have this stupid habit of investing in all the NFOs they possibly can. This is an insane idea. Don’t do it. Your portfolio will become a directionless and unmanageable mess.
- One more thing. NFO window is open for a week or so at the initial price of Rs 10 NAV. But that doesn’t mean that you cannot invest in the scheme later on after the NFO period is over. You can invest in them at any time even after the offer period. So it’s not like about missing something here. And NFOs are not like IPOs where investing during the launch period will lead to some huge listing gains or some big profits. So there shouldn’t be any FOMO (or Fear Of Missing Out) when you plan to climb the bandwagon of IPO or NFO.
- Till a few years back, fund houses used to launch NFOs when their existing (similar) schemes became too big to handle or started to underperform. But after’s SEBI’s epic MF recategorization and rationalization exercise of 2018, this practice has mostly stopped. In 2018, SEBI acknowledged that AMCs in India were offering just too many similar options to investors and this confused them and made them vulnerable to mis-selling. So it then mandated that AMCs could only offer funds within defined mutual fund categories, that too, they could offer just one fund in each of these categories. This somewhat curbed fund houses’ ability to launch new funds to garner more AUM.
So those were few thoughts I had about NFOs and how you can decide about them. And please don’t be in a hurry to start a SIP in NFO. You should only start a SIP once you are convinced about the fund’s long-term suitability for your portfolio.
Everyone can have their own views. But if you ask me about investing in NFO vs existing mutual funds, then here is what I think.
Unless the NFO offers something really unique that is not already available via existing funds, I will give NFOs a miss. And just uniqueness is not sufficient condition. The new fund should also be a good fit in my fund portfolio. I don’t want to make a zoo of unique funds. I would rather have a focused MF portfolio of few schemes that have proper intent and direction in their approach and provide necessary diversification without being too diversified. If there is a gap in my portfolio that can be filled only by a new NFO and not by other existing schemes, only then I will go for the NFO.
While investing in NFO might seem exciting, it’s better to invest in existing and proven schemes. The existing mutual funds come with established and reliable track records. Though they say past performance is no guarantee of future performance, it still gives some comfort that the fund has seen bull and bear market cycles and can use that experience to deliver reliable returns in line with expectations in times to come. Investing in NFO is a bit of a gamble and more like shooting in the dark. It might work out very well. Or might not. So you can’t be really sure.
Once you have thought about all the points that we discussed here, you can take a call about going for the NFO. And please don’t think that I am saying that all NFOs are bad. I am just saying that invest in them for the right reason (uniqueness, suitable for your portfolio and goals) and not the wrong ones (cheap Rs 10 NAV, media hype). And if you can’t seem to have any reason to go for NFO, then just stick with the existing, well-established mutual fund schemes.
So that was all you needed to know about new fund offers (NFOs) of mutual funds. I hope you now understand which side to take in investing in NFO vs. existing funds in India (2021).