Mutual Funds

Don’t make a mad dash for new funds

K Venkatasubramanian | Updated on June 29, 2014

Prudence pays Think before you jump ROBERT A METCALFE/SHUTTERSTOCK.COM


Check what is on offer and then take the plunge. Here are some tips to help you

As the market scales one peak after another on the hopes of an economic revival, new fund offers from asset management companies are making a beeline to grab investor attention.

But before you take the plunge to invest in these new schemes, you must ensure that you are doing so for the right reasons.

Lack of track record, availability of similar schemes and the false notions about being able to buy units ‘cheap’ are some of the key factors that should stop you from getting into an NFO. Also, charges are high during a new fund offer. Get into a new fund only if there are no existing alternatives or if there is any unique theme or mandate on offer. There are a couple of other cases where investing in NFOs may make sense, such as in the case of FMPs and close-ended schemes.

Lack of performance record

One of the most important factors while choosing any diversified scheme is its track record. Typically, a quality fund manages to deliver well across timelines and across most market cycles.

A scheme’s stock and sector choices over the years give you a picture of how the fund manages to churn its portfolio and take informed decisions. Over time, you would also become aware of the investment style of the fund manager in the case of an established scheme, which may not be possible in the case of an NFO with a new manager.

Next, most of the time there would be existing funds with similar mandates with a track record to go by.

So, for example, if funds come with mandates to invest in the Top 100, Top 200 or Emerging Equities, we know that there are already many existing funds available with a similar mandate. There are enough large-, mid- and multi-cap funds already in the market to cater to investors with varying risk appetite.

The other common mistake that investors make is that they feel units can be purchased ‘cheap’ at an NAV of ₹10 during an NFO. For all funds the NAV gives the value of current investments held on a per unit basis, of course, after accounting for the costs incurred.

So, it would be absurd to say a fund with an NAV of, say, ₹100 is ‘costlier’ than another at ₹10.

For example, if you invest ₹1,000 in both of these funds, you would get 10 units in one case and 100 in the other. If the NAVs increase by 10 per cent, you would have ₹1,100 in each of the cases. So the NAV is immaterial.

Funds are also allowed to charge a higher fee during the NFO for advertising, marketing and distribution. Many asset management companies tend to absorb these costs into their own P&L, sparing the investors from paying for it.

But till a fund gathers a certain level of corpus, charges tend to be higher compared with established funds with larger corpuses.

While for the most part it would be advisable to steer clear of new fund offers, there are cases where you can take the plunge.

When to go for it

First, in the case of fixed maturity plans, units are sold only during the NFO. So, if there is a quality FMP on offer, you must get in during the NFO.

Next, if there is a close-ended fund with a unique theme and mandate, again, you can buy units during the initial offer.

Finally, NFOs must be looked at only if they can fill a void. If there is a scheme that allows you to invest in stocks and sectors not available domestically, for example, then it is worth looking at. Typically, international funds of various hues and commodity schemes would fall in this category. But these come with high risks and currency too is a big factor. Barring small bouts of outperformance aided usually by a weak rupee, most international funds have not had any trailblazing record.

Even here there are existing funds that have track records, good or otherwise, to go by in recent years.

Published on June 29, 2014

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