Are You Selecting New Fund Offers Wisely?
New Fund Offers (NFOs) have been overwhelming the mutual fund market. Since January 2020, roughly 70 new funds were launched. Most of them have been open ended equity schemes, post the pandemic-imposed lockdown, categories such as international equities, smart-beta, ESG, multi-asset themes and exchange traded funds (ETFs) are being offered.
Through NFOs, many fund houses collect huge corpuses. The recently launched Invesco India Focused 20 Equity Fund NFO collected over Rs600 crore through its initial subscription. Since June, as reported by the money control, through NFOs the total inflow has been worth over Rs 35,000 crore.
Read: [Should You Invest in a Focused Fund Amidst Challenging Macroeconomic Conditions?]
The time of many NFO launches is crucial.
Why is it that most mutual fund houses launch NFO when market valuations appear stretched ?
The answer is simple: They want to make hay when the sun shines, garner more Assets Under Management when sentiments are upbeat or downbeat.
Read: [How to Invest in Mutual Funds amid Volatile Markets]
Also, many of these NFO come at a time when investors are unsure whether they should continue with their investments in merged schemes or exit. Instead, to fill in the gap mutual funds are launching NFOs and confusing investors even more.
Even in 2018, mutual funds garnered about Rs 1,25,000 crore through NFOs; at a time when many of their existing schemes were struggling to generate alpha over their benchmark.
Instead of trying to improve the performance of existing funds, many fund houses are busy launching new funds. Aren't they confident enough to attract investors through the track record of their existing schemes, instead of trying to sell on the novelty factor? Given below are 5 reasons why you should avoid NFOs.
While it is not wrong to come up with NFOs (if it's a unique proposition), what worries me is that many new funds have been assigned to the fund managers who are already managing 5-7 schemes or even more.
I do not think it is right to burden the fund manager/s more when they are already under pressure to improve the performance of his/her existing schemes. Naturally, the fund manager may lose focus on existing ones and may even lack the capacity to manage them efficiently. Not in the best interest of investors, in my opinion.
What should investors do?
I would like to point out that investing is an individualistic exercise. When you want to invest, keep aside the urge to add something unique that is distinct from the existing ones in your portfolio.
In fact, look at the characteristics of the NFO in terms of the portfolio details, asset allocation, number of stocks, fund management team, fund house's investment philosophy. And try to understand if its potential "Unique proposition" suits your financial palate (risk and goal).
Read: [Do You Know That Less Popular Funds Can Give You Good Returns?]
An ideal portfolio is one which is comprised of funds/investment avenues that match the investor's risk profile and work towards achieving his predetermined objectives. The performance of the funds (and thereby the portfolio) should be monitored regularly. If any fund fails to deliver the results expected from it, corrective steps need to be taken. That could involve exiting the fund or reducing the allocation made to it.
Conversely, in a situation wherein the funds are performing in an expected manner, there is no need to consider another fund while making fresh investments. Additions can be made to the existing holdings. Sure, diversification is important, but then we are assuming that the portfolio is already a well-diversified one.
Read: [Why You Cannot Ignore Reviewing Your Portfolio and Building an All-Weather Portfolio Now]
A portfolio with an unduly large number of funds stands the risk of becoming an untenable one. Monitoring and managing a portfolio which is fragmented can prove to be a cumbersome and time-consuming task. Furthermore, by investing in a new fund, instead of the existing ones, the investor forgoes the opportunity to invest in funds with proven track records and performance. And that may not be a smart move.
Conclusion
You should tread cautiously and invest selectively. PersonalFN is of the view that, investors need to outsmart opportunistic fund houses that want to grow their business without bothering about your interest.
Of course, not all fund houses are alike. Some of them manage their assets meticulously, avoid duplicating products, and reward investors well.
Therefore, when choosing a fund for your portfolio, do not forget to pay close attention the traits of a fund house--its ideologies, rationale behind launching the fund, whether the fund is unique, and the investment processes & systems at the fund house, besides the quantitative factors.
Instead focus on your long-term financial goals and aim to consistently invest in funds that optimise returns for the level of risk they expose you to.
Editor's note:
The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Do not miss our latest research finding. Get your access to this exclusive report, right here!
Warm Regards,
Aditi Murkute
Senior Writer
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