The Hindu Business Line : It’s all in the timing

Subscribing to new fund offers of mutual funds is not a bad idea. If the launch of scheme is timed close to a market bottom, there is every possibility of the individual making decent returns. But do investors usually make money in NFOs?

Going by the record of NFOs launched in the past two years, the answer is — not at all the time. Some of the theme funds had record collections last year but could not fully deploy the money collected for a long time because of the dearth of quality stocks. Market volatility also prompted many funds to hold 25-30 per cent of the portfolio in cash.

For this analysis diversified funds launched in calendar 2007 and 2008 were considered. Funds that came out with NFOs in calendar 2007 have not created wealth for the investors. The return divergence between the best in the category and the worst is huge.

Religare Contra Fund, launched in April 2007, was the top performer among the NFOs, reckoned from its launch.

Its absolute return since inception is 8.6 per cent (as of June 17, 2009) and it has trailed its benchmark S&P CNX Nifty by 4 percentage points. On the other hand, JP Morgan India Smaller Companies Fund generated negative returns of 53 per cent (absolute) since launch and trailed the benchmark CNX Midcap by eight percentage points.

The year 2008 was one of the worst for the market in recent times and fund houses mostly deferred new fund offerings. Some of them did go against the tide to launch schemes, but those launched in the first half of 2008 grossly underperformed.

The return divergence between the schemes that hit the market in the first and second halves of the year was huge. Birla Sun Life Special Situations Fund was launched close to market peak in January 2008. Since its inception it has recorded an absolute negative return of 21 per cent.

But schemes launched during the market correction in October generated hefty returns in the past nine months. The best was Principal Emerging Bluechip Fund, which recorded generated a return of 95 per cent. Other funds launched during the same time clocked returns in the range of 40-45 per cent.

Despite the reams of print devoted to the myth of low NAVs, NFOs do continue to find favour among investors for their availability at an NAV of Rs 10.

However, the track record of NFOs over the past two years suggests that they may be no better than established peers in bettering the benchmarks or containing downside.

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