Should you invest in New Fund Offers or Go with Existing Funds?

The bull run in the market has presented a lot of AMCs with the opportunity to launch a New Fund Offers (NFO) to complete their product basket. Consequent to the SEBI rule on scheme categorization, an AMC can now have only one fund in each category. So, any new fund launched by an AMC should be from a category or theme which it does not currently have. The table below shows the different categories of NFOs that came to the market during the year 2020. (Only Equity Funds & Equity oriented Hybrid Funds are considered)

So, the question that comes to the minds of investors is: should I add an NFO scheme to my portfolio or not? Before exploring this option, first let us clear the air about what exactly NFOs are.

Difference between NFO & IPO

There are many differences between an IPO and an NFO. Some of them are tabulated below.

When should an investor think of investing in an NFO?

1. Need of the Portfolio.

With restrictions put in by SEBI, it is now not very easy for a fund house to keep on raising funds by floating different schemes by offering the same product under a different name. With the categorisation initiative, as most AMCs already have the major categories, NFOs are usually thematic or sectoral funds. Each investor will have to analyse how these themes or sectors are going to work and how they can be useful in their portfolio.

For e.g., Motilal Oswal Nasdaq 100, which is an international fund, was launched with the objective of investing in stocks which are the constituents of the NASDAQ 100 Index. Now, NASDAQ 100 is one of the many indices of the US stock market. Investors who seek to invest in US companies to diversify their portfolio beyond Indian stock markets could definitely add such funds to their portfolio.

2. When the markets are at an all-time high.

If the perception of an investor is that the markets have become costly and when markets are at all time high levels (like the current situation) then investing in NFO could turn out to be a good idea. This is because, the fund manager has about 6 months to fully deploy its funds and since he will starting on a clean slate, he will be able to build a reasonably good portfolio considering all the prevailing circumstances in the markets.

For e.g., The Small Cap category currently has 23 funds and UTI AMC still launched a Small Cap Fund in the month of December. As per the Scheme Information Document (SID) the scheme has an option to maintain up to 35% of the portfolio in cash at any given point of time. This will help the fund manager to pick stocks at lower valuations whenever the opportunity arises, vis-a-vis existing schemes, which could find it difficult to shift their major exposure to cash or any other safer instruments as they have already deployed their money. If a correction occurs, the existing fund would get adversely affected as compared to the UTI Small Cap Fund. However, if the markets do not correct, you will see the UTI Small Cap fund under-performing if it has not deployed the funds fully. So even though it is a double-edged sword, the only advantage you get is to protect the down-side.

Few things that investor should be aware of with respect to NFOs

1. An NFO has no track record

The fact that it is a “new” fund offer implies that there is no track record to go by or base your investment on. In the absence of some past track record, an investor will have to rely on past performance of other funds of that fund house and also assess the performance of the fund manager.

2. Timing of Launch

Many a times, NFOs are launched by a fund house to complete its product basket, or if there is a demand for a particular investment theme (in the last 3 months, there were 5 thematic funds based on the concept of Environment Social Governance (ESG)). So, just because a fund is launched, it doesn’t necessarily mean that it is the right time to invest in that scheme, especially if there is demand for that particular category or theme.

3. Close-Ended

Investments in an NFO can be close-ended at times, i.e., the entry and exit from the fund are locked in. Investors will be able to exit from such funds when the lock-in period gets over. Hence, this needs to be a checkpoint before you consider investing in it.

 Conclusion

Investors should be aware of their portfolio and its need for changes. They should properly analyse whether the NFO will cater those needs and converge the portfolio with required allocation. Today, most investors are uncertain about whether the market has reached its peak or not. To reduce this risk, investors could consider the NFO route so that it will decrease the risk of a market correction on their portfolio. All in all, it is important that investors take a 360-degree view on whether an NFO is better, before adding them to their portfolio.

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Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.