Don’t Blindly Follow New Fund Offer (NFO) Schemes

Posted On Tuesday, Aug 30, 2011

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Every time a mutual fund launches a new scheme, the entire city (and nation) is plastered with hoardings, air time is captured by attractive promos, and newspaper front pages are dominated with clever messages on why you have to subscribe to this scheme. Aggressive messaging, and impressive spends ensure that you hear the same chant over and over again - a constant reminder that you need to act upon. Ignoring something with this much persistence would surely require some grit determination and a crystal clear thought process.


So towards obtaining a clearer perspective on New Fund Offers, let’s start with what exactly are NFOs and what is their primary objective.


New Fund Offers are to mutual funds what IPOs are to the stock market. Just like an IPO, NFOs are an attempt to raise funds. A new fund offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing securities.


All well till here.


However, the mindless subscription that follows new fund offers is a practice that investors need to be wary of. Are NFOs just a tactic to secure market share? Or do these avenues really offer value to investors?


Why the barrage?


Here’s a little exercise: Take a random pick of your favourite AMC and divide the number of schemes it has with the number of years it has been in existence. The number you get is a representation of how many schemes the AMC usually launches in a year.


What do you think? Do you really need approximately 4-5 new funds a year to invest in? Oh! And that’s only considering a single AMC. Multiply this number by the 43 AMCs in the industry. Quite an inundating figure, isn’t it?


Investing is simple. You need to fix your financial objectives. Choose avenues that will help you meet these objectives. Ensure that your risks are spread out. Make the most of every asset class. Simply put: invest in equity to create wealth over the long term, have some liquid assets for a rainy day and count on gold as a safe haven investment.


You need simple products that you can understand and which add stability to your finances.


What you definitely do not need is a bombardment of complex funds that risk your exposure to specific stocks and asset classes.


Stay informed and prevent yourself from falling for these common misconceptions that the NFO mania brings along.


#1 Lower NAV bluff


An NFO is not a discount coupon for getting mutual fund units at a cheaper rate. You might be tempted to consider a fund whose NAV is around Rs 100 to be more expensive and less profitable than an NFO at Rs 10. While in a case of simple math this may seem true, consider this example.


Mr. A invests Rs. 5000 in a NFO (let’s call this Fund 1) at Rs 10 per unit and Mr. B invests Rs. 5000 in an existing mutual fund scheme (and this can be Fund 2) at Rs. 50 per unit.

Units owned by Mr. A = 500
Units owned by Mr. B = 100

Now, assume that the market has performed well, and the NAVs of both schemes (NFO and existing) increase by 10%.
NAV of Fund 1 = Rs 11 (10% of Rs 10)
NAV of Fund 2 = Rs 55 (10% of Rs 50).

So after the appreciation,
Mr. A’s investment amount = Rs. 5500
Mr. B’s investment amount = Rs.5500.

The same!

The only difference is that while Mr. B invested in a scheme with experience and performance to back it, Mr. A has chosen a fund whose future and performance is yet to be established.


A lower NAV at the time of the NFO does not guarantee higher returns or profit. In fact, a high NAV indicates that the existing fund has been performing well and has the potential to achieve the fund’s objectives.


#2 Spreading the investment scope


No, investing in many funds does not mean the same as spreading out your investments. The idea of allocating investments to different asset classes is primarily to spread out your risks. By investing in many funds you could actually be negating the very principle of diversification. For instance, if you already own an equity oriented fund and are planning to invest in the next equity oriented scheme NFO, you run the risk of concentrating your exposure to a particular asset class and in specific to certain stocks. Most equity oriented funds have an overlap of the securities they hold with that of their peers. So watch out for duplicates that you could do without.


#3 Something new about the New Fund Offer


Shouldn’t a new fund have something different to offer? Existing schemes from various fund houses already provide you with unlimited options to invest. Hence, if you want to invest in an NFO, try and understand how the scheme differs from existing ones first. Therefore, unless a fund has something unique to offer it may be prudent to invest in fund which has an existing track record.


Sure, one of the best ways to go easy on your wallet is to hang in there till the sale period begins. So whether its the “Sabse Saste Teen Din” or the “Shop till you Drop” fiesta, you go and stash your wardrobes, kitchens, (and whatever storage space you find) with your loot sourced at decently discounted rates whether you currently need the item or not.


That is perfectly acceptable!


But there is no thumb rule that says that more is always better and cheapest is always good. So, if you apply the logic of “More the Merrier” to your financial investments and blindly follow the NFO frenzy to keep adding to your portfolio, you could be well headed towards a double jeopardy situation. Do you really need yet another fund in your portfolio?


Now, we’re not saying this on an impulse, in fact it’s quite the contrary - we wouldn’t want you acting on an impulse. And we hope that the next time a New Fund Offer catches your eye you will evaluate it a little more closely.



Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the scheme`s objective will be achieved and the NAV of the scheme(s) may go up or down depending upon the factors and forces affecting securities markets. Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the Sponsor / AMC/ Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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