MF New Fund Offerings (NFO) are back in the market…

According to a recent report, there are nearly 35 new fund offerings (NFOs) lined up from various mutual fund houses. For starters, an NFO is the equivalent of an IPO. While companies raise money through an IPO, a mutual fund raises fresh money through an NFO. But the question is that a mutual fund is always available on tap and one can go and buy any fund from the AMC at any point of time. So what is the idea behind a mutual fund NFO? Basically, mutual funds use an NFO to launch a new idea or a new scheme altogether. The NFO helps them to create the market visibility and excitement to ensure that it is fully subscribed. Interestingly, the last time we saw such a large number of NFOs was at the peak of the previous bull market in 2007. Post 2009, mutual funds in India were seeing redemptions continuously till 2014. It is only after mid-2014 that the tide changed and Indian mutual funds again started getting inflows. The question therefore is what should investors do in the midst of this barrage of NFOs?

Ensure that the NFO has a unique story to tell…

An AMC must launch an NFO if there is a unique idea or theme that is not covered by its existing available schemes. Another NFO for a plain vanilla diversified fund is not really justified. You can as well invest in one of its existing schemes. Also, when you invest in NFOs don’t get carried away by the NFO price of Rs.10/-. The NFO price really does not mean anything. The fact of the matter is that even if you buy an NFO today at a price of Rs.10/- the fund will still be investing funds at the Nifty level of 8700. The price of the NFO, therefore, hardly has any relevance. Many investors mistake this to be like an IPO at par value of Rs.10. That is not the case!

Check who is the fund manager of the NFO…

An important test that you can run is to check the fund manager of the NFO and what has been that fund manager’s track record. Don’t judge the fund manager’s track record purely based on returns over the short term. That can be quite misleading because you invest in mutual funds for the long term. Therefore, ensure that the fund manager has been able to consistently outperform the market index in most of the years over the last 10 years. Also check the Sharpe and Treynor ratios of the fund manager who is likely to manage the NFO. These will give you an idea of whether the fund manager has taken excess risk to earn higher returns. You need to evaluate your mutual fund investments in terms of returns per unit of risk. That is what the Sharpe and Treynor ratios provide you with. Be cautious if the NFO is going to be managed by a fund manager who does not have an established track record in the market.

Does the NFO theme have credibility at this point of time?

This is a very important question that you must ask yourself before you invest in an NFO. Let us consider a few instances. A consumption related theme may be currently credible as we are looking at a situation when the Indian consumption story is likely to give exponential returns. Such themes may be worth considering at this point of time. What about a theme like IT or pharma which are seen as dollar defensive sectors? The problem is of perception and visibility. The IT sector is currently facing constriction of margins and slower growth. The pharma sector, on the other hand, has a problem of handling stringent regulatory oversight. These are the factors you need to consider while investing in an NFO. It is best to evaluate if the NFO theme is in tune with the big themes that are having visibility at the current point.

Does the scheme fit into my goals?

This is the final and most important question that you need to ask about any mutual fund NFO. You have a target exposure to a particular sector or theme. If investing in the NFO is going to over-expose you to a particular theme or sector then it is best avoided. You must only invest in an NFO if it finally passes the test of fitting into your overall financial goals.

NFO offer investors an opportunity to latch on to a particular theme or story. It also gives the fund a story to tell the investors and entice them to invest. As an investor, you need to exercise due care. You need to be clear that the NFO offers something unique that existing funds do not offer. You must also be clear that the NFO is offering a story that is credible. But above all, you must convince yourself that investing in the NFO is perfectly in tune with your long term financial goals.

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