Data from the Association of Mutual Funds in India showed that over the past seven years, mutual funds have launched more than 2,200 new plans in the country.
A fund house launches an NFO for several reasons. “They could fill a gap in one of the categories or they could launch a thematic fund when a particular sector or theme is doing well,” said Kavitha Krishnan, senior analyst – research director, Morningstar India.
An NFO by an asset management company (AMC) is much like an initial public offering (IPO) by a company. As part of this, an AMC issues new fund units to invest in a particular theme, which may be international large-cap, mid-cap or even bonds.
At the NFO stage, a fund house hasn’t even built a portfolio of stocks or other instruments. At this point, a fundraiser is simply raising the money.
Many investors prefer an NFO to existing funds because a new fund is available at a price of ₹10, which is its net asset value (NAV). However, experts say this is a bad strategy, which many investors, including Bhatnagar, are adopting.
“Investing in an NFO just because it could earn a higher return could be counterproductive for an investor’s portfolio,” Krishnan added.
We take a look at the factors you should keep in mind when investing in NFOs.
According to experts, the main reason for the demand for new funds is that most NFOs are sold, not bought.
“Most NFOs are pushed by agents, distributors or relationship managers because they are on commission. Everything that is marketed will have takers. Also, new investors who are not used to mutual funds believe that an NFO will give them an attractive entry point, which is a mistake, “said Vidya Bala, co-founder of Prime Investor.” There is no such thing as a cheap NFO. NAV is just an assigned price, so don’t be mistaken in believing it’s cheaper. “
Better returns are not guaranteed in an NFO either. The value of an NFO whose price is ₹10 could increase by the same percentage amount compared to that of an existing fund.
This is mainly due to the fact that valuations are driven by the growth of the underlying assets of both funds.
In addition, experts believe that NFOs are generally more expensive than existing funds.
“There is a lot of expense involved in launching a new fund. The fund house often invests heavily in promotion and marketing and these expenses are ultimately passed on to the end investor. It is also important to remember that funds with smaller AUMs (assets under management) may charge higher expenses, per regulatory standards. These factors could actually make a new fund more expensive compared to an existing fund, ”Krishnan said.
As an investor, whether or not to invest in an NFO depends on the nature of the fund and whether it is an existing category or a new theme.
Suresh Sadagopan, founder of Ladder7 Financial Advisories and a registered investment advisor with Sebi, believes that investing in NFOs makes no sense.
“There are a lot of funds available in each category today. It is true that the track record cannot be extrapolated into the future, but at the same time one cannot ignore the track record of the fund house and the manager, “Sadagopan said.
In recent years, the active investing segment has become crowded, with most AMCs having multiple funds in almost every category.
Rushabh Desai, a Mumbai-based mutual fund distributor, suggests sticking with existing funds in the active segment if they are doing well. However, a case can be made for the NFOs on the passive side.
“There are a lot of index funds that are attractive. For example, Mirae came up with a very unique FANG fund that attracted investors who wanted exposure to global tech giants, ”Desai said.
Another example is the Motilal Oswal Nasdaq 100 NFO index, which was launched in 2011, as India did not have a US-based passive fund at the time.
Investors should consider how an NFO will fit into their portfolio, assess the risks, and compare its spending with existing funds.
Additionally, investors should not invest in an NFO on the assumption that a new fund will generate better returns.
“It’s a misconception that all NPOs create better value than existing funds. Many investors invest because of the price of the NAV; however, that doesn’t mean it’ll give you double-digit CAGR (compound annual growth rate) returns, ”Desai said.
A theme may seem attractive to investors, but they should wait at least two to three years to understand how a new theme works or how it will perform in the market. Also keep in mind that if a fund is launched during market highs and there is a strong correction, investors will take a big hit in the fund.
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