Back To Basics: Should you jump on to the NFO bandwagon?

After a lull, the floodgates have opened for NFOs (New Fund Offers). SEBI lifted the curbs on them in July. Several fund houses have come with new schemes under various sectors and themes, apart from even offering regular diversified and tax-saving funds. We get to see a lot of fund manager interviews in the media with compelling narratives to invest in these NFOs.

But before you invest in a new fund, here are some key factors to consider before parting with your money.

Check category track-record

Investors should check for long-term returns – trailing and rolling – of existing funds among other factors before making a call. But a new fund has no track-record. So here what you can do is check the track-record of other schemes from the same category as the NFO. For instance, check mid-cap funds for a mid-cap NFO. There are about 18 mutual funds (MFs) in the mid-cap space which have a track-record of more than 10 years; of this, seven schemes have beaten their benchmark during the period. Hence, for such category one should invest in existing MFs with such good track-record rather than going for an NFO of the same category.

If an NFO for a sectoral fund or a new theme is launched, you must consider them only if they are unique and are likely to enhance the returns of your main portfolio consisting of diversified funds. Examples are a few NFOs on unique themes such as AI (Artificial Intelligence) and global investing that were launched in the recent past. There are some passive NFOs with unique themes open right now for subscription such as Mirae Asset Global Electric & Autonomous Vehicles ETFs FoF and Navi Nifty India Manufacturing Index Fund. However, the timing of entry and exit becomes important in such cases.

Portfolio Podcast | Key things to keep in mind while investing in NFOs  Portfolio Podcast | Key things to keep in mind while investing in NFOs  

Check fund manager’s track-record

A fund manager’s qualification and experience play a major role in the performance of an actively managed MF. Let’s say the management of an NFO is given to a fund manager with no experience in that category; it is likely that he/she will take time to develop a strategy and deliver consistent returns. Hence, investors should not subscribe to such an NFO and rather wait to see if the fund manager is able to generate good returns sustainably. Also, if the person does not have experience in handling a fund, then one can look for his/her stock recommendation record as an analyst tracking a particular sector while considering sectoral NFOs.

Don’t look at the low NAV

Many investors have fallen into trap of believing that NFOs are cheap. They think that an NAV (Net asset value) of ₹10 is ‘cheap’ and presents a great return-generating opportunity than a fund with ₹100 NAV. But the ₹10 in an NFO is just a number and has nothing to do with cheap or costly entry points. An existing fund with a much higher NAV may present a better investment opportunity if it builds on its already consistent long-term track-record. Hence absolute NAV number should never be a deciding factor.

Weigh the costs

When you invest in NFOs, the costs are quite high for the regular plan. Also, the assets under management (AUM) are lower and total expense ratio (TER) only decreases as the fund’s size increases. For instance, for the first ₹500 crore of AUM, the maximum TER for the equity MFs can be 2.25 per cent, while for the next ₹250 crore it is 2 per cent and so on. Generally, an MF raises certain amount during the NFO, and the AUM size increases as it starts performing well. Consequently, the cap on TER starts reducing and hence those who invested their money at a later stage might enjoy better TER compared to those subscribing in the NFO. Obviously, a fund shouldn’t be compared with another only based on their TER, but it is definitely one of the indicators.

Does it fit your portfolio?

One key aspect to understand is whether an NFO is a good fit to your existing MF portfolio, considering your risk appetite, timelines and financial goals. If your portfolio already has a quality pharma fund that’s performing well, you don’t need another similar scheme . If any new theme that is unique and has good long-term or even short-term opportunistic potential comes up and you have funds not tied to any near-term financial goals, you can look at subscribing to the scheme. However, waiting to check how the strategy plays out is always recommended.

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