Reasons to Say NO to an Mutual Fund NFO

They capitalised on the upbeat sentiments in the capital markets. These rollouts have been Multi-cap Funds, Flexi-cap Funds, Mid-cap Funds, Value Funds, Sector & Thematic Funds, Balanced Advantage Funds, Passive Funds (Index Funds and Exchange Traded Funds), international Fund of Funds (FoFs), and a few debt-oriented schemes.

More than ₹75,000 crore was garnered through various scheme launches, both active and passive. It appears that investors, perhaps perceiving NFOs to be cheap, have fallen for the ₹10 NFO proposition.

But, i strongly believe there are some good reasons why you should say no to NFOs.

Not all NFOs are unique – after SEBI’s categorisation and rationalisation guidelines for mutual fund schemes, most fund houses are trying to fill up the gaps in their product basket with NFOs. In order words, they are simply trying to realign and re-bundle products without the underlying investment strategy and the portfolio being always unique. This also makes it difficult for them to own a unique underlying portfolio. Do not blindly invest in these NFO  as they are offered at Rs.10. Consider investing in these schemes if they can really add value to your portfolio.

Most NFOs are launched when market momentum is bullish – This is a bit worrying because most fund houses launch their NFOs during the exuberant market phase. By then, it’s likely the market rally has excited you, a fact mutual fund houses are aware of. Thus, they float NFOs during such times. NFOs do the rounds when markets have scaled new highs, valuations look stretched, and the margin of safety is narrow. Thus, the respective fund manager’s chance of getting good bargains while constructing the portfolio is limited.

NFOs have no track record to rely on – An NFO does not have a performance track record and the only way to make an informed decision is from the information you have access to in the Scheme Information Document (SID). But when there is an assessable performance track record (of at least three years), making an appropriate choice becomes fairly easy. If data of a longer period is available, you could even evaluate how the fund has fared across market phases (bull, bear, and consolidation) to check on the consistency with which the fund has delivered returns.

You might have an existing mutual fund schemes to choose from – The existing mutual fund schemes that have completed minimum of three years and witnessed market phases could be a better choice. The fund manager may be holding a robust portfolio that has stood the test of time. While past performance is not necessarily indicative of the future returns, it at least stands as testimony or indicates whether you should consider investing in the respective existing scheme or give it a miss.

Fund Wallet never recommended an NFO to its Investors. We apply the following parameters while identifying schemes-

• Returns over various time frames – 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 10-year, and since inception.
• Performance across market phases (i.e. bull and bear phases) in case of equity-oriented schemes.
• Performance across interest rate cycles (upward and downward) in the case of debt-oriented schemes.
• Risk ratios (Standard Deviation, Sharpe, Sortino, etc.)
• The AUM and expense ratio of the scheme.
• Portfolio characteristics. In the case of equity funds, the top-10 holdings, top-5 sector exposure, how concentrated/diversified is the portfolio, the market capitalisation bias, the style of investing- value, growth, or blend – and the portfolio turnover. In the case of debt funds, the average maturity, modified duration, and the quality of debt papers.
• The quality of the fund management team (experience of the fund manager, the number of schemes he/she manages, the track record of these schemes, the experience of the research team.
• And the overall efficiency of the mutual fund house in managing the investors’ hard-earned money i.e. the proportion of AUM actually performing.

If the investment strategy and calls taken by the fund manager prove right in times to come, it could potentially yield you respectable returns.

Happy Investing!

R♥Vi

Fund Wallet is an AMFI registered Distributor of Mutual Funds. This post is for education purpose only and not a recommendation to buy or sell.