New fund offers: Consider investing in differentiated offerings only

Also invest if you can lock in returns or can view the record of underlying fund

New fund offers (NFOs) of mutual funds have managed to mop up about Rs 21,173 crore this financial year (data as on November 30). Most NFOs hit the markets in bullish times when optimism is high, with the Sensex ending 2020 on a new high of 47,751. 

Fund houses such as Axis, Kotak, BNP Paribas and UTI have filed offer documents for new launches with the Securities Exchange & Board of India (Sebi). So, NFOs will continue to hit the markets in the near future. It is advisable to avoid a fund until it develops a track record. But you may make an exception to this rule under certain circumstances.  

Is there a differentiator?

Think of investing in an NFO only if it has something unique to offer and meets a financial need. Take the example of Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund. This was a novel concept wherein investors were getting exposure to a health care index consisting of both Indian (consumer plays) and global (research and development plays) stocks. Another example was Nippon India Flexicap Fund-of-Funds (FoF), which offered exposure to a low-cost, passively managed, multi-cap portfolio in the FoF format. “Consider investing in an NFO, if it offers something— a geography or a strategy/theme—that was unavailable earlier,” says Vishal Dhawan, founder and chief executive officer (CEO), Plan Ahead Wealth Advisors.

Can you lock in the returns?

In schemes that have a fixed maturity plan (FMP) structure, the investor can see the yield to maturity (YTM). He knows that the return from the fund will equal the YTM minus the expense ratio, provided he holds it until maturity. NFOs of Bharat Bond Exchange Traded Fund (ETF) and Nippon India ETF Nifty CPSE Bond Plus SDL-2024 Maturity scheme offered investors exposure to such structures along with portfolios of high-quality bonds. Such strategies may be considered in a falling interest-rate environment.

Is it a tried and tested strategy?

Sometimes, as in an FoF structure, the Indian fund will invest in an international fund that has a long track record. By looking up data on the underlying fund, investors can get a fair idea of its track record. One offering of this type was Invesco Global Consumer Trend FoF, which offered a chance to invest in a global fund that, in turn, invests in consumption-oriented stocks.

Back-tested results are not foolproof

Fund houses often showcase back-tested results of the strategy they are offering to make the case that it will produce great returns. But great back-test outcomes are no guarantee for future returns. Strategies that look great in back-testing often fail in actual market conditions, where the dynamics can change drastically. “The back-tested portfolio would be a static one that doesn’t account for the constant flow of money in and out of the portfolio,” says S Sridharan, founder, Wealth Ladder Direct.

Beware of thematic offerings

The majority of NFOs that hit the markets are thematic in nature. Be wary of them. “Sectoral or thematic funds may outperform the broader markets during a specific period, but investors should know when to exit,” says Pankaj Mathpal, founder and CEO, Optima Money Managers. Most retail investors fail to time their exit correctly. Their narrow mandate is another issue. 

“If that sector/theme fails to deliver, the fund manager can’t move out of it. Investors will get stuck until the sector/theme recovers,” he says.