Mutual fund companies like issuing newer products. Often, new fund offerings (NFOs) are only marginal variants of existing products.
With continual flow of new products, choosing an NFO could be difficult. You can check the SEBI website to view the list of proposed NFOs.
In this article, we discuss how you should select an NFO.
If yes, you need a strong reason to ignore the existing fund and invest in the NFO. Why? All index funds based on the same benchmark will carry the same stocks. You should not buy the NFO because its NAV is ₹10 per unit.
Suffice it to know that NAV does not matter when it comes to comparing index funds using the same benchmark. Unless the NFO has significantly lower fees (check for expense ratio), you should always select an existing index fund.
But what if the NFO is an index fund on a new benchmark? If the benchmark is appropriate to meet your life goals, invest in it.
You could also buy the fund for your satellite portfolio if you believe that the benchmark index will do well in the short term.
Note that the above arguments are true for exchange-traded funds as well.
What if the NFO is an active fund? You typically buy an active fund only if you believe that the fund will beat its benchmark index.
No history to go by But you have to analyse a fund’s past performance to check if it can possibly beat its benchmark index in the future. This, despite the statutory warning that past performance is no indicator for the future!
The issue with an NFO is that it does not have a history of past performance. So, you cannot analyse the fund. This means it is typically better to buy an existing active fund than an NFO.
So, when should you buy an NFO that is an active fund? Your investment decision will be better if you concentrate on a fund’s investment style and not on its investment strategy.
Investment style can be a clear product differentiator, whereas investment strategy need not always be.
For example, it does make a significant difference whether a fund buys, say, HDFC Bank or Indian Overseas Bank. A large-cap fund will buy the former while a mid-cap fund will buy the latter; that is the investment style differentiator.
It may not always make a significant difference whether a fund buys HDFC Bank based on the company’s expected earnings growth or its dividend policy; that is the investment strategy differentiator.
The benchmark is an indicator to the fund’s investment style. So, invest in an NFO only if the investment style (read benchmark) is new, unique or innovative.
NFO confusion It is important that you do not think that NFOs are cheaper than existing funds. Suppose an asset management firm has two funds with the same benchmark, where one is an existing fund and the other, an NFO.
The NFO will be issued at an NAV of ₹10 per unit while the existing fund may reflect a higher value. If both funds follow similar strategies, hold similar stocks and have similar fees, your returns from both the funds will also be similar.
So, a higher NAV is not necessarily bad, especially if it is an active fund. Finally, remember this: Financial intermediaries aggressively sell NFOs for various reasons.
You should take responsibility for your investment decisions. Invest in NFOs only if they have significantly different or unique characteristics compared to existing funds.
Caveat Emptor.
The writer is the founder of Navera Consulting. Send your queries to portfolioideas @thehindu.co.in