 "All NFOs aren't bad for the portfolio")
One way of selling a new fund offer (NFO) is by telling a client that a Rs 10 net asset value (NAV) is cheaper than a well-established scheme with an NAV of Rs 100. 'You will get more units of the scheme with the same investment' is the sales pitch - a completely false claim. The fact is, if the NAVs of both schemes were to rise or fall by 20 per cent, the investor would make or lose the same amount of money.
In addition, themes doing well are often promoted as 'flavour of the season', misleading the investor. Around 150 equity and hybrid schemes have raised Rs 22,000 crore in the past year. Such and rampant mis-selling has forced many financial advisors to say investors should not buy NFOs at all. Go for an established scheme with a good history is the recommendation of most of them.
Says Suresh Sadagopan, financial planner: "We mostly do not recommend NFOs and prefer established schemes, where we are comfortable with the fund manager's performance."
Says Kartik Jhaveri, director, Transcend India: "Not all funds' NFOs should be shunned. But one should look at the pedigree of the fund house before investing."
Here's a look at some broad categories, launched recently.
Open-end schemes
A number of fund houses have launched open-end schemes such as large-cap funds, mid-and-multi-cap funds, dividend-yield schemes and exchange-traded funds (ETFs). With a large number of existing schemes in these categories, investors do have the benefit of looking at historical performance of some of those existing for a long while. For example, in the case of diversified schemes, Franklin India Bluechip Fund has existed for a little over 20 years and has returned almost 23 per cent annually. Then, there is HDFC Equity and HDFC Top 200, with returns of 22.5 per cent and 20 per cent annualised for almost 20 years.
Says Hemant Rustagi, chief executive officer (CEO), WiseInvest Advisors: "In the diversified large-cap categories, investors can go for established brand names because there is no specific advantage that comes to the investor by investing through an NFO. In fact, even experienced investors should look at other schemes before taking the call to invest."
Similarly, even in the case of mid-and-multi-cap funds or dividend-yield schemes, there are enough ones which performed remarkably well. However, one needs to be more careful with mid-and-small-cap schemes, as the performance is very varied. The best performing one in the category, the Reliance small-cap fund, returned 127 per cent in the past year. Many others have returned less than 50 per cent.
In the case of ETFs, the difference between benchmark and scheme, ideally, should not be much unless there is tracking error (when the return of the scheme is less or more than the benchmark index). So, unless you are a very discerning investor, selecting an ETF should not be very difficult. Among these, the Goldman Sachs CPSE ETF is unique because it gave a discount of five per cent to retail investors. In addition, there is an additional loyalty bonus (one unit for every 15 held) for holding the scheme for a year. "When such schemes are launched, investors find it quite luring. But they need to use other benchmarks like the performance of the public sector companies' index of the BSE to take such calls," says fund manager.
Strategy: First-time investors should avoid NFOs' basic large or mid-cap schemes. Go for well-established ones. Experienced investors can look at these after checking the portfolio requirement and if they already have schemes of a fund house which is doing well. In the case of ETFs, there is little product differentiation
International funds
While these are also open-end schemes, this has been considered separately because it is in the genre of sector or thematic schemes. Fund houses such as HSBC, DSP BlackRock, Reliance, Pinebridge and others have launched international schemes.
However, global mutual fund schemes haven't had the best run compared to Indian equity funds in the past year. The best performing large-cap Indian scheme, HDFC Equity Fund, has returned 60.08 per cent in the past year. Without considering ETF, Tata Growing Economies Infrastructure Fund has returned the best amid international funds at 17.44 per cent in the same time period. All other international funds have given single-digit returns.
Another point to remember is that investing in a particular region has its own risks, in terms of country and currency risk. Jhaveri feels one should avoid over-exposure and use these purely as a diversifier, as things are looking quite good in India.
Sadagopan says unless they are looking to invest in a particular country, they would go by existing schemes. "We would only look at something that has a completely different strategy or there is a country or consortium of countries in a thematic format that I want to invest in," he says.
Strategy: First-time investors should avoid these. Even experienced investors should use as portfolio diversifiers, at best, and have limited exposure of 10-15 per cent. Among countries, the US should come first because it has been doing quite well.
Closed-end schemes
In the past year, as many as 44 closed-end equity schemes have been launched. At the very outset, there is one big problem here. Investors cannot use the systematic investment plan route with these. So, if you don't have a lump-sum, it makes little sense to invest in these. Investors are forced to commit a lump-sum because once the scheme closes, there cannot be a fresh collection. This can hurt the scheme's performance as well, since the fund manager does not get any fresh money to average out costs if the stock he favours falls sharply.
Closed-end mutual fund schemes are where the investor can't exit for a certain period, such as three or five years. Though these are listed on the exchanges to provide an exit route, the absence of liquidity makes it difficult to sell units. If desperate, one might have to exit at a discount. Jhaveri, however, feels there could be some place for these schemes in a portfolio. "If an investor does not have enough mid-cap exposure or needs more. then I would recommend it."
Some financial planners aren't very comfortable with these schemes because of the absence of any empirical evidence that closed-end equity schemes will perform better than open-end ones. So, from that perspective, why should one get into a scheme that will not allow an easy exit route?
In products like fixed maturity plans, getting locked in works because the fund manager can buy debt instruments matching the scheme's tenure. It is different with equities. Financial planners feel if someone has the tendency to churn or move money, such schemes work because they are forced to stay invested. But the price to be paid for the absence of discipline can be high. If the market tanks before maturity, there could be serious losses staring at you. Once you have invested in such a scheme, there is no way to review its performance, an important thing for NFOs, and exit if the performance is not up to the mark.
Strategy: First-time investors should not start with closed-end schemes unless they want to put a lump-sum and forget about it. Experienced ones who understand that timing the market is not possible and they might have to hold it longer than the prescribed three or five years can invest
Hybrid schemes
A number of fund houses have introduced hybrid schemes, which include capital protection funds - a combination of debt and equity that will ensure the investor's capital is protected.
However, some fund houses have introduced interesting products which will include arbitrage strategy as the main focus. These include NFOs by JPMorgan, Axis Mutual Fund, Kotak MF and others. These schemes will have equity and debt in 20-25 per cent but the other 75 per cent will use the arbitrage strategy, by buying and selling equity in the cash and the derivative market.
The interesting part about this scheme is in spirit, arbitrage is like a debt fund strategy because you buy and sell the instrument at the same time and, consequently, get locked on to the returns. But the tax department treats it as an equity fund because the underlying instrument is equity.
After the new debt fund guidelines were introduced in the recent Union Budget, in which an investor who exits debt funds between one and three years will have to pay tax as in his or her income tax bracket, unlike the earlier 10 per cent without indexation and 20 per cent with indexation guideline, this scheme could be a good option for debt fund investors. For one, the returns would be closer to debt funds. In addition, there would be a fillip from the equity portion. The best part: The taxation will be like equities. So, there will be no tax after one year on these schemes.
Strategy: Ideally, investors need not put money in schemes that only ensure capital-protection. Even if you are close to retirement, one can entirely invest in debt. First-time investors should avoid it. An arbitrage fund, in the new avatar, can be a good option for investors who favour debt.
In addition, themes doing well are often promoted as 'flavour of the season', misleading the investor. Around 150 equity and hybrid schemes have raised Rs 22,000 crore in the past year. Such and rampant mis-selling has forced many financial advisors to say investors should not buy NFOs at all. Go for an established scheme with a good history is the recommendation of most of them.
Says Suresh Sadagopan, financial planner: "We mostly do not recommend NFOs and prefer established schemes, where we are comfortable with the fund manager's performance."
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However, with the Securities and Exchange Board of India (Sebi) nudging fund houses to reduce the numbers of similar schemes, many have started merging these. And, if launching new ones, the strategy is different. For example, there are closed-end schemes, hybrid schemes that are merging equity, arbitrage and debt in the same scheme and, of course, a number of international funds. So, should one look at NFOs at all or simply shun these?
Says Kartik Jhaveri, director, Transcend India: "Not all funds' NFOs should be shunned. But one should look at the pedigree of the fund house before investing."
Here's a look at some broad categories, launched recently.
Open-end schemes
A number of fund houses have launched open-end schemes such as large-cap funds, mid-and-multi-cap funds, dividend-yield schemes and exchange-traded funds (ETFs). With a large number of existing schemes in these categories, investors do have the benefit of looking at historical performance of some of those existing for a long while. For example, in the case of diversified schemes, Franklin India Bluechip Fund has existed for a little over 20 years and has returned almost 23 per cent annually. Then, there is HDFC Equity and HDFC Top 200, with returns of 22.5 per cent and 20 per cent annualised for almost 20 years.
Says Hemant Rustagi, chief executive officer (CEO), WiseInvest Advisors: "In the diversified large-cap categories, investors can go for established brand names because there is no specific advantage that comes to the investor by investing through an NFO. In fact, even experienced investors should look at other schemes before taking the call to invest."
Similarly, even in the case of mid-and-multi-cap funds or dividend-yield schemes, there are enough ones which performed remarkably well. However, one needs to be more careful with mid-and-small-cap schemes, as the performance is very varied. The best performing one in the category, the Reliance small-cap fund, returned 127 per cent in the past year. Many others have returned less than 50 per cent.
In the case of ETFs, the difference between benchmark and scheme, ideally, should not be much unless there is tracking error (when the return of the scheme is less or more than the benchmark index). So, unless you are a very discerning investor, selecting an ETF should not be very difficult. Among these, the Goldman Sachs CPSE ETF is unique because it gave a discount of five per cent to retail investors. In addition, there is an additional loyalty bonus (one unit for every 15 held) for holding the scheme for a year. "When such schemes are launched, investors find it quite luring. But they need to use other benchmarks like the performance of the public sector companies' index of the BSE to take such calls," says fund manager.
Strategy: First-time investors should avoid NFOs' basic large or mid-cap schemes. Go for well-established ones. Experienced investors can look at these after checking the portfolio requirement and if they already have schemes of a fund house which is doing well. In the case of ETFs, there is little product differentiation
International funds
While these are also open-end schemes, this has been considered separately because it is in the genre of sector or thematic schemes. Fund houses such as HSBC, DSP BlackRock, Reliance, Pinebridge and others have launched international schemes.
However, global mutual fund schemes haven't had the best run compared to Indian equity funds in the past year. The best performing large-cap Indian scheme, HDFC Equity Fund, has returned 60.08 per cent in the past year. Without considering ETF, Tata Growing Economies Infrastructure Fund has returned the best amid international funds at 17.44 per cent in the same time period. All other international funds have given single-digit returns.
Another point to remember is that investing in a particular region has its own risks, in terms of country and currency risk. Jhaveri feels one should avoid over-exposure and use these purely as a diversifier, as things are looking quite good in India.
Sadagopan says unless they are looking to invest in a particular country, they would go by existing schemes. "We would only look at something that has a completely different strategy or there is a country or consortium of countries in a thematic format that I want to invest in," he says.
Strategy: First-time investors should avoid these. Even experienced investors should use as portfolio diversifiers, at best, and have limited exposure of 10-15 per cent. Among countries, the US should come first because it has been doing quite well.
Closed-end schemes
In the past year, as many as 44 closed-end equity schemes have been launched. At the very outset, there is one big problem here. Investors cannot use the systematic investment plan route with these. So, if you don't have a lump-sum, it makes little sense to invest in these. Investors are forced to commit a lump-sum because once the scheme closes, there cannot be a fresh collection. This can hurt the scheme's performance as well, since the fund manager does not get any fresh money to average out costs if the stock he favours falls sharply.
Closed-end mutual fund schemes are where the investor can't exit for a certain period, such as three or five years. Though these are listed on the exchanges to provide an exit route, the absence of liquidity makes it difficult to sell units. If desperate, one might have to exit at a discount. Jhaveri, however, feels there could be some place for these schemes in a portfolio. "If an investor does not have enough mid-cap exposure or needs more. then I would recommend it."
Some financial planners aren't very comfortable with these schemes because of the absence of any empirical evidence that closed-end equity schemes will perform better than open-end ones. So, from that perspective, why should one get into a scheme that will not allow an easy exit route?
In products like fixed maturity plans, getting locked in works because the fund manager can buy debt instruments matching the scheme's tenure. It is different with equities. Financial planners feel if someone has the tendency to churn or move money, such schemes work because they are forced to stay invested. But the price to be paid for the absence of discipline can be high. If the market tanks before maturity, there could be serious losses staring at you. Once you have invested in such a scheme, there is no way to review its performance, an important thing for NFOs, and exit if the performance is not up to the mark.
Strategy: First-time investors should not start with closed-end schemes unless they want to put a lump-sum and forget about it. Experienced ones who understand that timing the market is not possible and they might have to hold it longer than the prescribed three or five years can invest
Hybrid schemes
A number of fund houses have introduced hybrid schemes, which include capital protection funds - a combination of debt and equity that will ensure the investor's capital is protected.
However, some fund houses have introduced interesting products which will include arbitrage strategy as the main focus. These include NFOs by JPMorgan, Axis Mutual Fund, Kotak MF and others. These schemes will have equity and debt in 20-25 per cent but the other 75 per cent will use the arbitrage strategy, by buying and selling equity in the cash and the derivative market.
The interesting part about this scheme is in spirit, arbitrage is like a debt fund strategy because you buy and sell the instrument at the same time and, consequently, get locked on to the returns. But the tax department treats it as an equity fund because the underlying instrument is equity.
After the new debt fund guidelines were introduced in the recent Union Budget, in which an investor who exits debt funds between one and three years will have to pay tax as in his or her income tax bracket, unlike the earlier 10 per cent without indexation and 20 per cent with indexation guideline, this scheme could be a good option for debt fund investors. For one, the returns would be closer to debt funds. In addition, there would be a fillip from the equity portion. The best part: The taxation will be like equities. So, there will be no tax after one year on these schemes.
Strategy: Ideally, investors need not put money in schemes that only ensure capital-protection. Even if you are close to retirement, one can entirely invest in debt. First-time investors should avoid it. An arbitrage fund, in the new avatar, can be a good option for investors who favour debt.