Mutual Funds

Knocked out by new fund offers

Nalinakanthi V | Updated on: Oct 05, 2014
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Having made their equity debut through new fund offers, a few investors have sworn off them. We spoke to them to find out why

If you know someone who invested in mutual funds in the eighties and nineties, just say ‘NFO’ and watch them turn red with anger. With the mutual fund industry at a nascent stage then, many investors who put their money in new fund offers burnt their fingers.

Of course, there has been a sea-change in the MF industry since then, with the regulator cracking down on unnecessary launches and funds too learning from their mistakes. Investor awareness too has improved by leaps and bounds.

But that’s not to say all is hunky-dory. Over the last decade too, many investors have not had a happy experience with NFOs. Despite many equity mutual fund schemes delivering handsome gains in the last one year, many launched close to the last market peak in 2007-08 have barely delivered any returns despite holding periods of five to six years.

So, what should you do? Invest in NFOs or stay away? We spoke to a few people who have been active investors in new mutual fund schemes to understand their perspective.

Bad timing of offers

“I had invested in the new fund offers of over 18 schemes — between 1992 and 2006. But NFOs no longer appeal to me and I have hence not invested in new funds in the last eight years,” says L Raghunandan, who is employed with a PSU bank. His maiden NFO investment was in the UTI Master Gain 92 scheme, launched in 1992. He is not just an avid investor in mutual funds, but is also very passionate about equities and keeps close tabs on the market.

Why did he decide to keep away from NFOs? He replies: “I have never been comfortable with investing in NFOs at market peaks. I used to attend investor meets organised by fund houses during NFO launches. During one such meet in mid-2007, I asked the fund managers why they chose to launch a new scheme at a time when the market already seemed overheated. Their response only made me paranoid about investing in NFOs. The manager and the fund house justified the timing by saying that new schemes get noticed by retail investors only when the market is in an upswing!”

“When you invest in a new equity scheme launched at the last leg of a bull market, the probability of your investment delivering handsome returns is quite low. Not just that, in many cases you even run the risk of losing your principal, if you end up catching them right at the top,” he cautions.

“Investing in theme or sectoral funds is even riskier. I am yet to recoup the principal I had invested in Chola Contra Fund (now taken over by L&T) when it was launched in early 2006,” he adds. However, he has not completely written off mutual funds. “I continue to invest in mutual fund schemes, of course, only those with good track records,” says Raghunandan.

What’s his final word? Is it a complete no? Not really. Raghunandan believes NFOs are meant only for investors with a longer investment horizon. “If you are looking to invest, say, for a three-to-five-year period, NFOs may not always be the best way to maximise returns.”

No to close-ended funds

Anuradha Narayanan, executive assistant in a public limited company, has been investing in new fund offers for over 10 years now. “While the recent ones have not been very satisfactory, the ones that I invested in in early 2004-05 have given me good returns,” she says. “With the markets having remained volatile, my SIP investments have fared better than my lump-sum MF investments. On an average the schemes in which I’d invested in a systematic way have given me 20-30 per cent annually, much higher than the one-time investments.”

“Why I am wary of NFOs is because of my bad experience with a few thematic funds – Tata Infrastructure Fund and Sundaram Energy Opportunities. I am yet to recoup my principal in these funds and this has added to my scepticism towards NFOs,” she explains. “Since then, I have decided to restrict investment to funds that have been operational for a while and those with good track records.”

Fund houses have been flooding the market with close-ended funds, of late. So will she invest? She says categorically: “I would avoid investing in close-ended funds. My past experience with close-ended funds has not been very encouraging.” Also, close-ended funds lack flexibility when it comes to redeeming investments, she says. Should the fund performance not be satisfactory, investors do not have the option to cut losses and move their money to safer avenues. Though these funds are supposedly listed on the stock exchanges, liquidity is the real challenge. Unless there are buyers on the other side, it may not be easy to liquidate these units.

However, she agrees with Raghunandan that one should not completely write off NFOs. “If you have a really long investment horizon of, say, 10 years or more, then NFOs may not be a bad idea,” she says.

“Invest in new funds only if you have the patience to stay invested for a reasonably longer period of time.”

NFOs for the long haul

Venkatesh Seshadri, who after a successful career abroad moved to Chennai and is currently an independent IT consultant, echoes the views of Raghunandan and Narayanan. Seshadri, an equity enthusiast, made his first direct equity investment soon after he completed his bachelors degree in engineering. He has been investing in mutual funds for almost 14 years now.

“My first NFO investment was in Sundaram Select Midcap; it worked really well for me,” says Seshadri. As a zealous equity investor who understands the fundamentals of the companies that he invests in, he cautions new investors to not get carried away by the NAV. “Don’t invest in NFOs just because they sell units at par value of ₹10, buying them at par value does not mean that you are buying them cheap, ” he warns.

Published on November 22, 2014

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