Normally when we are looking to start our investments in Equity Mutual funds we consider the universe of funds that have been in existence for a fair amount of time. Some financial planners will tell you that you should not even look at a fund which has not been around for at least 10 years and more. This makes sense at one level, after all with a fair amount of track record in place it is easy to see how the fund has performed in different market conditions. You will therefore have an idea on both the returns as well as the associated volatility and this will help you to select one appropriate to your needs.
What about NFO from Fund houses then, that are announced from time to time? Should you at all look at these or simply avoid them and stick to only established funds? Are there any situations where investing in an NFO makes sense? Before answering the questions let us take a look at why fund houses come up with NFO s in the first place? A large part of the reason is for them to gather more investments from existing and new investors of their funds. They can do the same for their old funds too, but from a marketing viewpoint there are many takers for something new that is packaged well. With the investor community extending to newer investors at a rapid rate this strategy has been reasonably successful.
The other reason for a NFO is a different mandate than what the existing funds are having. For example last year ICICI came up with several NFO for their Value Fund series. This series of funds had a mandate to invest in stocks that will appreciate in value over an investment period of 3 years. They felt that the markets were poised for growth in the medium term and wanted to make payouts to their investors either in form of dividends or capital appreciation. Note that this is quite different from the normal MF schemes that we invest in. There are other NFO s that get created due to specific situations in the market and these can be linked to a particular sector or market valuation itself.
Now coming back to the question of whether you should look at an NFO, an important thing to understand is that the money gathered through the NFO will be used for buying equities on the current market values. So, you may be buying these at less or more expensive prices depending on the market. The problem is when the times are good to buy any NFO will not find many takers. 2008 or 2011 would have been great time for buying but a bad time for launching NFO. Similarly 2014 had the markets at their most expensive point but a lot of NFO s were launched. The fundamental logic of having a lot of investment ability and flexibility to deploy all that money is ideal for a fund manager, if he can get himself into that position. Unlike existing funds, he is not stuck with the old choices, he can take a look at the next 10 years from now.
In my opinion, there will be very little point in investing in an NFO that is similar to a fund you are already holding. So if HDFC comes up with another Mid cap fund and you are already subscribed to a Mid cap fund, from HDFC or otherwise, in your portfolio then do not even look at it. Even if you are a new investor who is starting to build a portfolio, it will really make far greater sense to invest in funds with good track record, though the time frame need not be 10 years plus.
What about fund types that you do not have in your portfolio, say like sector funds. Here too, if you want to invest in a sector fund then stick to one of the existing funds. At a fundamental level though, I am against investment in sector funds as a diversified equity fund will generally meet all your investment objectives. This really leaves NFO s that are launched for special purposes and situations like in the ICICI case I mentioned earlier. You need to look into your financial objectives closely and decide as to whether the particular NFO makes sense for you. Do not be dogmatic about it, in the personal finance space rigidity of views is the worst possible enemy you can have.
My experiences with NFO has been rather interesting. In 2005 when I started buying MF regularly I was into one time purchases and bought these regularly for a period of 1 year or so. I would invest 25000 Rs in each NFO and chose 2-3 every month out of the numerous ones that flooded the market. These have not done badly in terms of returns, I sold most of them after 1-2 years but still hold on to a few. From 2008 onward I am investing in about 5 funds regularly with a combination of SIP and one time purchases. The only NFO I purchased recently was the ICICI Value fund series. This was with the specific objective of creating a passive income stream that would take care of my expenses.
As several people have wanted to know about my MF investments I will share it in the next post.
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