With the revival of the equity market, the flood of new fund offers (NFOs) has started again. Since May, as many as 12 NFOs have already made their debut in the market. Also, a lot more are expected to follow as many of the mutual fund companies have filed offer documents with Sebi and are waiting for approval.
NFOs are more or less like initial public offerings (IPOs), however, the difference is the fact that money collected through IPOs is for the future growth of a company, whereas, fund invested in an NFO is reinvested in the market for the wealth creation of investors.
From early 2008 till March 2009, the equity markets were not performing well on the back of global economic slowdown. Most of the shares are down substantially and so are the mutual funds’ net asset values (NAVs).
Many of these funds, which are now available at a discounted price from their peaks, have already shown a satisfactory performance in the past. This throws up the question on whether one should go for bottom fishing for existing mutual funds at relatively cheaper prices and proven track record or is it better to get started with the wave of NFOs.
Why old is gold
The first advantage of going with an existing mutual fund is the fact that these are tries and tested. They have a track record. A good past performance, however, does not guarantee the same performance in the future but at least, gives you an idea about the performance of the fund during different business cycles. Here you know about the objective and investment strategy of the fund.
A fund, which has been performing well for a long time, is expected to do well in future, too. According to Krishnamurthy Vijayan, executive chairman, JP Morgan Asset Management, advantage of investing in an existing mutual fund is the fact that you know the track record of the fund. You are well versed with the style of investment.
I V Subramaniam, CIO at Quantum Advisors, agrees with Vijayan. “Existing funds gives the comfort of investing because it carries a track record,” says Subramaniam.
Most of the time NFOs do not carry any new features. Their investment style remains same but, of course, they carry fancy names with new marketing strategies to sell the product. Many of investors follow the general notion that a fund, which has an NAV of Rs 10, is cheaper than a fund, which has an NAV of Rs 100.
However, this is a myth and often used by sales people to hard-sell their products. According to Vijayan, the price of the underlying asset determines the NAV. NAV of an NFO is Rs 10 because the fund has not been invested. As such there is no difference in the price.
NAV is the net market value of the holding securities inclusive of cash, divided by the number of mutual fund units. Hence, a similar increase in the share prices of the holding shares will have the similar impact on the NAVs of both the existing and NFO equally. A fund, which enjoys higher NAV has appreciated in value and that shows the fund’s performance.
If you still find the NFO lucrative, let it pass through the litmus test before you take the buying decision. Before you buy always look back to your portfolio, whether you already possess similar funds. If the fund present in your portfolio has all the major features that the new fund is offering, there is no point buying a new one.
Investment is a long-term affair.
Before you buy an NFO, you must check whether the fund matches your investment objective. Every NFO comes with a new theme - India growth story, infrastructure, diversification beyond the border - however, many a time this may be just a marketing strategy.
Beware of such NFOs. A NFO always lacks the track record and hence, one must check the scorecard of the fund manager of the fund. Look for the performance of the funds managed by the same fund manager. Also, one must keep in mind that during good times every fund does well, the challenge lies in performing during bad times such as 2008. Hence, make sure that funds managed by the fund manager have performed during the crisis.
AMCs make hay while the sun shines and they will continue launching NFOs around different themes — you need to decide whether you want to be carried away by these waves or not.
NFOs are more or less like initial public offerings (IPOs), however, the difference is the fact that money collected through IPOs is for the future growth of a company, whereas, fund invested in an NFO is reinvested in the market for the wealth creation of investors.
From early 2008 till March 2009, the equity markets were not performing well on the back of global economic slowdown. Most of the shares are down substantially and so are the mutual funds’ net asset values (NAVs).
Many of these funds, which are now available at a discounted price from their peaks, have already shown a satisfactory performance in the past. This throws up the question on whether one should go for bottom fishing for existing mutual funds at relatively cheaper prices and proven track record or is it better to get started with the wave of NFOs.
Why old is gold
The first advantage of going with an existing mutual fund is the fact that these are tries and tested. They have a track record. A good past performance, however, does not guarantee the same performance in the future but at least, gives you an idea about the performance of the fund during different business cycles. Here you know about the objective and investment strategy of the fund.
A fund, which has been performing well for a long time, is expected to do well in future, too. According to Krishnamurthy Vijayan, executive chairman, JP Morgan Asset Management, advantage of investing in an existing mutual fund is the fact that you know the track record of the fund. You are well versed with the style of investment.
I V Subramaniam, CIO at Quantum Advisors, agrees with Vijayan. “Existing funds gives the comfort of investing because it carries a track record,” says Subramaniam.
Most of the time NFOs do not carry any new features. Their investment style remains same but, of course, they carry fancy names with new marketing strategies to sell the product. Many of investors follow the general notion that a fund, which has an NAV of Rs 10, is cheaper than a fund, which has an NAV of Rs 100.
However, this is a myth and often used by sales people to hard-sell their products. According to Vijayan, the price of the underlying asset determines the NAV. NAV of an NFO is Rs 10 because the fund has not been invested. As such there is no difference in the price.
NAV is the net market value of the holding securities inclusive of cash, divided by the number of mutual fund units. Hence, a similar increase in the share prices of the holding shares will have the similar impact on the NAVs of both the existing and NFO equally. A fund, which enjoys higher NAV has appreciated in value and that shows the fund’s performance.
If you still find the NFO lucrative, let it pass through the litmus test before you take the buying decision. Before you buy always look back to your portfolio, whether you already possess similar funds. If the fund present in your portfolio has all the major features that the new fund is offering, there is no point buying a new one.
Investment is a long-term affair.
Before you buy an NFO, you must check whether the fund matches your investment objective. Every NFO comes with a new theme - India growth story, infrastructure, diversification beyond the border - however, many a time this may be just a marketing strategy.
Beware of such NFOs. A NFO always lacks the track record and hence, one must check the scorecard of the fund manager of the fund. Look for the performance of the funds managed by the same fund manager. Also, one must keep in mind that during good times every fund does well, the challenge lies in performing during bad times such as 2008. Hence, make sure that funds managed by the fund manager have performed during the crisis.
AMCs make hay while the sun shines and they will continue launching NFOs around different themes — you need to decide whether you want to be carried away by these waves or not.
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