Invest in NFOs only if it helps in diversifying your portfolio: Experts

Stick to proven fund houses with at least a 5-year track record and see how they performed over market phases

After a lull, the mutual fund industry has come up with a slew of New Fund Offers (NFOs), with  at least 15 announced so far in July. This does not include launch of the fixed maturity plans (FMPs).

Securities and Exchange Board of India (Sebi) had ordered a suspension on the launch of NFOs this April as the industry could not implement the norm of not using pool accounts to invest in MF folios. As the industry implemented the rules of fund flow, the NFO ban was lifted.

What is on offer?

The new fund offers include a wide variety of products. Baroda BNP Paribas (flexicap), IDFC (Midcap) and Quant (large-cap) announced launches in core categories to fill up gaps in their product offering. White Oak MF launched Flexicap Fund and Mirae Asset launched Balanced Advantage Fund. Aditya Birla Sunlife and DSP MF launched schemes offering strategies based on momentum -- ABSL Nifty 200 Momentum 30 ETF and DSP Nifty Midcap 150 Quality 50 Index, respectively. Motilal Oswal MF has launched BSE Healthcare ETF and S&P BSE Financials ex Bank 30 Index Fund. Quantum MF has launched a Fund of Fund that will feed into units of Nifty 50 ETF. The sheer variety is enough to confuse investors, and the trickle could soon turn into a deluge.

Why bet on an NFO?

Why should an investor put money in an NFO when there are existing schemes? “It is possible that the NFO may be offering something completely different. The offering could be a better way of doing what existing funds are already doing. A performance track record doesn't change anything since it isn't an indication of a scheme's future performance. NFOs must be analysed alongside existing funds and an investor must examine whether or not their investment approach resonates with his, or provides diversification,” Rajiv Shastri, Director and CEO, NJ Mutual Fund, said.

Advantage of existing fund

However, some experts believe an existing fund may be better for an investor. “A lot of NFOs are not new product innovations but mostly done by AMCs trying to fill categories where they don’t have funds. Stick to proven funds with at least a 5-year track record and (see) how they performed over market phases,” Girirajan Murugan, CEO, FundsIndia said.

However, he said that exceptions can be made if the offering is unique and cannot be replicated by existing funds and the fund manager has demonstrated performance in other similar funds.

Choosing thematic or diversified

Thematic or sector funds are of high risk-high return nature. “High-risk taking investors can consider theme-based approaches for diversification and these should not exceed more than 10 per cent of the overall portfolio,” S Sridharan, Founder & Principal Officer, Wealth Ladder Direct, said.

However, Shastri feels thematic funds are for more mature investors. “Investing in theme offerings is a semi-DIY approach in which the investor takes responsibility for the performance of the theme while the security selection is managed by the scheme. If an investor has the time and bandwidth to manage this on an ongoing basis, then it is a viable approach. If not, then it is best to invest in a diversified scheme,” he said.

Consider your needs

It makes sense to first assess one’s portfolio before investing. Check what type of product will work for you. For example, if you see your allocation to equity going below the desired level, invest in an equity fund. “Investors must check if the fund fills a gap in their portfolio and makes sense from a diversification perspective,” Murugan said.

Sridharan advises not to be drawn in by the seemingly low NAV of NFOs. “Investors should look at factors other than just the NAV of the scheme at Rs 10. The older and the bigger the fund, the higher the NAV will be. Investors should look at the uniqueness, underlying portfolio, sectoral allocations and how all these fit into the portfolio,” he said.

Dos and Don’ts while investing in NFOs:

Dos

. Assess your portfolio to identify gaps

. Invest if the NFO helps in diversification

. Analyse the investment approach of the NFO

. Invest if there is a unique wealth creation theme

. Check if existing MF schemes work better

Don’ts

. Avoid thematic funds as they are risk-prone

. Limit exposure to thematic funds to 10% of portfolio

. Do not look only at the NFO NAV

. Avoid NFO if a similar well-performing fund exists