Beware: NFO Downpour Ahead!

The monsoons gave us a near total miss in June. Yet it was too early to hit the panic button. The farmer, policymaker, stock market speculator – everyone set their hopes on a normal monsoon in July that could make up for the shortfall.

Meanwhile in the mutual funds arena it’s been raining plenty – although a different kind of rain. One that aims to capture the best of euphoria in the present investment climate in the country. Read on to know what we’re talking about.

It’s raining New Fund Offers!
Happy days are back for mutual funds and distributors! With the Sensex touching new highs, almost month after month, several fund houses are scurrying to launch new funds. After the damp phase since 2011 the NFO season is predictably back, in full force.

New Equity Funds count

It’s not a matter of surprise that equities come to the notice of all, even non-investors, when markets are in the jubilant mode. But the point to ponder is when there are 300+ equity schemes available for investors to choose from (already giving you a hard time choosing!) why are so many more new schemes being launched? Are the new schemes expected to achieve some altogether new feat that none of the existing schemes are capable of?

Perhaps it’s got to do with investors’ craze for “newness”. Often it’s easier to push a new product than sell existing equity funds. Perhaps it’s also got to do with the unhealthy combination of lack of proper awareness among investors and the skill of distributors in convincing potential investors. But the fact is that many of these NFOs manage to garner much money.

In the previous NFOs era of 2007-08, NFOs sold like hot cakes on the back of several misconceptions floating around, the biggest of them being the “Rs 10 NAV is cheap; I should buy now than later when NAV rises”. Needless to say, many of the NFOs of those times did not do well; many later had to be merged with other existing schemes. Although fund houses and distributors don’t shout this from the rooftops anymore many investors still seem to carry this old misconception.

Are NFOs bad?

NFOs by themselves are not the culprit. You might come across an NFO that fits your investment plan just perfectly. Perhaps one of the fund houses that have won your trust and loyalty might launch an NFO to complement their offering or for some other genuine reason. (One would expect in such a case that there aren’t schemes in its existing product line that could substitute the new fund.)

However investors should know that not all NFOs are launched with genuine reasons benefitting investors. Sometimes the motive is ulterior.

The income of AMCs is directly linked to the size of the assets they have for management (the AUM). And many times the only reason why a new fund is being offered is to attempt to garner more AUM from investors, showing the opportunistic side of fund houses.

No, we don’t believe it’s bad to aspire to grow and make profits; but not by sidelining the best interests of a business’ clients. And this is precisely what launching NFOs at market peaks often amounts to. Allow us to explain that for you.

The noble slogan sung by fund houses launching new funds is, “markets are at their all time high; are you taking the benefit of it?” However investments make money when you enter at a low level and exit later on at higher levels. An investor who rushes into equities when markets are at historic peaks is taking much more risk than those who invest at lower levels.

Of course he’d be better off having entered at the time than not if later on the markets have only risen from that level. But nobody can accurately predict future market directions since the performance of investments is ultimately linked to the state of affairs in the world we live in, and nobody can foresee all things! Sound investors would be happy for the investments already made but prudence would keep them from getting too excited about committing large lumpsum investments at market peaks.

Instead we believe fund houses should tell people honestly during market peak times, the time when new investors are attracted to equities, they should not let excitement get the better of them. Not discourage investments but paint a true picture. Encourage adhering to a plan for investments and invest systematically.

We can say this with confidence since at Quantum we have always been doing so through our mailers. During market peaks we have encouraged investors to stay put and stick to an investment plan than impulse. The last Akshaya Tritiya we even advised investors to avoid buying into gold despite us having gold funds among our offerings!

What you should do as an investor this NFO season?

Invest in an NFO if and only if there is a compelling reason to do so. Is the scheme right for your financial need? Does the fund offer you exposure to an asset class or a market that is missing in your portfolio? For instance you might have sufficient equity exposure and might require a gold fund. Or perhaps your funds are giving you sound exposure to large cap stocks and you wish to have a little exposure to mid caps.

If this is the case do check if there are alternatives to the NFO. Are there existing schemes with good track record that can meet your need? With existing funds you have track record to compare against its peer funds and also one gets to study the investment style or process. NFOs do not have a record of performance so investors would have to go based on the stated investment objective and trust.

If there aren’t any good existing schemes for alternatives, use still another criterion before considering the NFO. Is the NFO from a fund house that has earned your trust? This is paramount. It carries the same logic why you choose a doctor or lawyer more for his credentials than for the fancy furniture in his clinic or office. So go beyond the promotional advertisements… to the core of how the AMC manages its funds, its investment philosophy etc.

If you have not invested in equities ever, do not hesitate to start now. You never know, it may be rewarding to enter now than later. However do not risk putting large sums at once, consider staggering investments over a long period through the SIP feature of mutual funds. And remember, it has to be a long term affair, the money you don’t plan to call back in at least 5 years. Skip the NFOs unless the fund house you trust does not already have a scheme which can serve the goal of your investment.

To view schemes of Quantum please check the funds page. We’ll be happy to assist with any query you may have about our funds; do call us on 1800-209-3863 / 1800-22-3863 or drop a contact me request.

Above article is authored by Quantum.

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