Several equity new fund offerings (NFOs) launched this year have been on caught the wrong side of the recent market meltdown.
More than a third, or 50 out of 145 such funds, are trading below their net asset values (NAVs), according to data collated from Value Research. Investors purchase units of a new scheme at the face value of the units, which is typically ₹10.
Motilal Oswal Nifty India Defence Index Fund, whose NFO closed in June, has fallen 19.3 per cent since launch and its NAV is down to ₹8.07. ICICI Prudential Energy Opportunities Fund, which has assets under management of over ₹10,400 crore, is down 1.8 per cent since its launch in July. The NAV of SBI Innovative Opportunities Fund, with an AUM of ₹8,174 crore, has slid to ₹9.76.
The buoyant market environment, strong product pitches, digital outreach by AMCs and the push by distributors have driven the new fund offers.
“Most of the recent NFOs have been launched near the market peak and are experiencing the brunt of a broad-based selloff,” said Nirav Karkera, Head of Research, Fisdom.
October has been a challenging month for the market, with the Nifty shedding 6.3 per cent, and Nifty Midcap 100 and Nifty Smallcap 100 down 7.7 per cent and 6.6 per cent, respectively.
Risk-taking ability
Investors end up overestimating their risk-taking ability whenever markets rise sharply, said Vicky Mehta, an independent analyst. Funds weave interesting narratives around investment themes during such periods, which investors end up buying into.
“Many of the NFOs may have had a rather weak investment proposition and got launched because markets were doing well and as a means to gather assets. For instance, many of the defence funds got launched after the story had long been discovered and stocks had run up sharply; so valuations weren’t particularly attractive,” said Mehta.
Mutual funds have garnered over ₹72,000 crore by way of equity NFOs this year, of which 85 per cent is from sectoral/thematic schemes, which typically have more concentrated portfolios.
“Sectoral and thematic schemes are never going to be consistent performers like diversified funds and are like one-trick ponies that do well only when the underlying sector or theme is doing well,” said Mehta.
To be fair, while the negative NAV shows the new funds in a bad light, one-, three- or even six months may be too short to evaluate their performance.
That said, steep corrections in the past have hurt sectoral/thematic funds in a big way. The crash of 2008 in the aftermath of the global financial crisis, for instance, particularly hurt the infrastructure funds. While it did not stop the growth of thematic funds per se, many investors turned their backs on infra funds for good.
Mehta believes that such funds can form a part of the satellite portfolio, comprising not more than 15-20 per cent of the total portfolio. “Retail investors should ideally steer clear of sector/thematic funds,” he said.
"Thematic funds should serve a purpose in the portfolio. There is no point in owning a defence fund if you already have a manufacturing fund that has defence stocks in it. Similarly, there is no need to own a manufacturing fund if you are already invested in a flexicap fund, which has a number of manufacturing stocks in it,” added Karkera.