Investors are foolish! That's what mutual fund houses perceive investors to be. You see, they take advantage of ferocious market rallies and try to woo investors with New Fund Offers (NFOs) that make little sense, especially considering their current product portfolio. On one hand mutual fund houses talk about investor education programmes and making them financially literate and wise, and on the other, they expect investors to be irrational and give good response to NFOs.

What's the new reason this time for launching NFOs?

If you happened to invest in equity mutual funds 6-8 years back; you would still recollect how aggressively "natural resources" theme was promoted. After all it was a commodity boom across the globe. NFOs garnered huge corpus, but what happened thereafter, everybody knows. Mutual funds had launched around 48 NFOs in 2007; however that number dropped to just 17 in 2009 when markets traded at their multi-year lows. Similar phenomenon can be witnessed now.

Now that NDA Government is enchanting "Make in India" mantra, manufacturing theme is being promoted. Also, mutual fund houses are launching focused funds that target to keep portfolio brief and concentrated besides launching opportunities and mid and small cap funds. As reported by Business Standard on September 04, 2014, in this calendar year so far, fund houses have launched about 40 equity oriented schemes which exceed the number of NFOs launched between 2011 and 2013.
 

On-going NFOs...

Fund Name	Type	Opened on	Closing at
ICICI Pru Growth Fund-3 (G)	Diversified	17-Sep-2014	01-Oct-2014
Reliance Capital Builder Fund (G)	Diversified	17-Sep-2014	01-Oct-2014
JPMorgan India Equity Savings Fund-Reg(G)	Diversified	22-Sep-2014	01-Oct-2014
Birla SL Focused Equity Fund-3 (G)	Diversified	07-Oct-2014	21-Oct-2014

(Source: ACE MF, PersonalFN Research)  

Fund houses have relied more on close ended funds than the open ended ones this time. Close ended funds give the fund manager more flexibility in managing assets but there are many disadvantages to investors.

PersonalFN is of the view that, investors should be wary of NFOs. It is strange that mutual funds didn't sense any opportunity in equity space when markets dropped to attractive valuations towards the end of 2012. Nobody seemed interested in launching focused or mid and small cap oriented funds then. Valuations in midcap space were more attractive then than what they are. Mutual funds appear to be more interested in garnering business rather than paying close attention to such issues.

PersonalFN is of the view that, investors need to closely assess as to which fund houses are being more opportunist in nature. While rating funds, PersonalFN considers this factor and slashes the rating of such fund houses. Such rating downgrades eventually affect the total score of every scheme offered by that fund house.

In spite of having raised this issue several times, PersonalFN still gets a number of queries asking its views on new fund offers. Considering the fact that many more fund houses have lined up NFOs, PersonalFN gives you reasons for avoiding all of them
 

More to come...

Offer Documents filed for	Type
Axis Equity Opportunities Fund	Diversified
LIC Nomura Banking & Financial Services Fund	Thematic
Birla SL Manufacturing Equity Fund	Thematic
Birla SL Emerging Leaders Fund	Diversified

(Source: ACE MF, PersonalFN Research)  

5 Reasons for avoiding NFOs

1. They don't have any track record and most of the times mutual funds sell old wine in new bottle; meaning they launch funds that are pretty similar to ones currently offered by the fund house.
    
2. More often than not, NFOs are launched when market momentum is strong, valuations are stretched, investors' confidence is high and there is good news all around. This limits the chance of fund managers getting good bargains while constructing portfolio.
    
3. NFOs are often sold as Initial Public Offers (IPOs) and investors expect listing or quick gains. Taking advantage of this tendency, sometimes brokers lure investors by 10 rupee per unit cost.
    
4. NFOs have no track record to rely on
    
5. You always have an option to choose a scheme from the existing ones based on their track record. NFOs can't provide you any better opportunity unless they have any extraordinary feature, which is rare to find.

PersonalFN is of the view that, investors need to outsmart opportunist fund houses that want to grow their business without bothering about you. Of course, not all fund houses are alike. Some of them manage their assets meticulously and avoid repetition of products. While choosing a fund for your portfolio you shouldn't forget to pay close attention to traits of a fund house.

If you feel you don't have enough time or expertise to shortlist best funds for your portfolio, you may take advantage of research services provided by PersonalFN.

Add Comments

Comments
jrsthebull@gmail.com Aug 14, 2018 Hi You made a point that brokers will say that you are getting a unit at Rs10, that is very cheap. But, indeed, it is not. Can you please elaborate on this point?? Thanks in advance.
dv78m3yejo@hotmail.com Jan 07, 2015 That's a smart way of looking at the world.

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