In the last 6 months, we have seen multiple NFOs from mutual fund companies. The NFO collections have been quite promising, indicating the acceptance of mutual funds as a preferred vehicle to park money by retail investors.
New Fund Offers (NFOs) are mainly launched when the markets have shown good returns in the last 6 months to 1 year and they do hardly come in bear markets. In the first quarter of March 2020, there were hardly any NFOs as equity markets were down more than 25%.
Understanding the need for a new theme/sector in the portfolio requires careful evaluation of the new funds objective. Most of the new funds are just filling gaps in the Fund House Product basket and can be practically irrelevant to a mutual fund retail investor.
If you are considering to go for an NFO, the following points should be considered:
1) Track Record of Fund House – NFOs do not have any track record but the fund management team has a track record of managing multiple themes in the earlier roles. The fund manager’s track record gives the investors some idea of how have they fared during bear markets and bull markets.
2) Old Wine in New Bottle – A lot of new funds are just the same idea but with a new fund house, which already exists in the portfolio. If you already have a Large Cap fund in your portfolio which is doing well, you would not like to look at another large-cap fund with a similar fund objective. This will only add more funds without adding any diversification to the portfolio. Most of the stocks will be overlapping with the existing large-cap fund.
3) Sector Funds – Recently we have seen multiple Banking and Financial Services Funds being launched by fund houses mainly focusing on only one sector of the economy. The downside to this strategy is that the fund will do well only when this sector does well. Having not more than 5% allocation to a sector fund is advisable in a fund portfolio.
4) International Funds – There are multiple International Fund NFOs focusing on different geographies across the world. These funds add currency diversification and also country diversification. A lot of investors get swayed by the past performance of these funds which have done well in specific timeframes without understanding the currency risk and nature of the foreign market. It’s advisable not to overdo the allocation to these funds and keep it below 10% of the overall portfolio.
New Fund Offers are opportunities to look at your investment portfolio and ask the question that do you need a new theme in your portfolio. Most probably the answer is No. Don’t fall for the aggressive sales efforts of mutual fund companies. Discuss with your financial advisor before adding a new fund to the portfolio.
(By Abhishek Gupta, Partner, Moat Wealth)
Disclaimer: There are the personal views of the author
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