It’s a century!
Yesterday, Mirae Mutual Fund launched Mirae Asset Hang Seng TECH ETF. This is the 100th new fund offer (NFO) on the mutual fund street so far this year, 2021. In the past week alone, the MF industry has launched as many as 10 new schemes; and 10 on an average every month this year. Together, mutual funds have collected over Rs 76,000 crore in 2021 (till October 31) through NFOs.
Mutual funds have collected over Rs 76,000 crore from NFOs this year. Index funds, exchange traded funds (ETFs) or fund of funds-investing overseas (see: table) have seen the most number of roll outs. These categories were left out by SEBI in its 2017 categorisation circular.
Most of these index funds and ETFs are either theme-based or sector-focused. These are also the categories SEBI made exceptions for, while stating that MFs would otherwise need to follow the one scheme per category rule.
To be sure, several of the new funds are innovative. Financial planners state that NFOs getting launched during this bull market are different from those rolled out in previous rallies. There is a lot more focus on international funds than domestic schemes, which was not the case in the past.
But there is one more reason behind the so-called different nature of NFOs this time around. In 2017, the capital market regulator SEBI re-categorised mutual fund categories and asked fund houses to align all their existing schemes in the 36 categories it laid out. Last year, SEBI added another category; Flexicap. Additionally, it allowed all fund houses to have just one scheme per category, except in index funds / ETFs, fund of funds and sector and thematic funds. Small wonder then the majority of NFOs launched have been in this category <see table>.
Innovation may be good for any industry. But do retail investors need so many new funds or are there enough options already available in the existing product categories?
Also listen | Simple Save podcast: How should investors handle the NFO deluge
Funds with broad vs specific focus
As mentioned earlier, several of the new funds are giving investors exposure to international equities. These might also be funds based on themes such as electric vehicles, international real estate or even blockchain technology. International funds give investors the much-needed geographical diversification in their investment portfolios, which otherwise tends to be biased towards the home country.
However, financial planners say retail investors need not get into all types of international funds.
“For most investors, a US-based international fund tracking the broad index may be good enough to get overseas diversification. Such funds could also gradually give investors exposure to a wide range of sectors, even the new-age ones as these grow in size,” points out Amol Joshi, founder of Plan Rupee Investment Services.
A market index increases allocation to companies and sectors as they grow in size.
“US has a long history of capital markets and they are well-regulated,” Joshi adds.
Says Nishant Agarwal, managing partner and head-ASK Wealth Advisors, “Investors should be cautious when it comes to theme-based, sectoral or international funds with narrow focus. Such funds are more suited for sophisticated investors who track global markets and themes regularly and know when to enter and exit such funds.”
“Investors may look at US and emerging market funds for geographical diversification,” Agarwal adds.
How many funds are enough?
Financial planners say 8-10 funds are usually enough and it is better to look for investments with a long track record.
You can have a combination of large, mid and small-cap funds, ensure that there aren’t too many overlaps in your portfolio. A well-diversified equity fund is typically spread across a variety of sectors, without being too concentrated. Apart from these, a couple of debt funds, an international scheme and a gold fund would take care of most of investors’ needs. To diversify further, you may consider a different fund management style in each category.
“For example, an Axis Flexicap Fund follows growth style of investing, while the Franklin India Flexicap Fund follows value style of investing. So, these funds are likely to have more differences in their stock holdings,” says Deepak Chhabria, chief executive officer and director at Axiom Financial Services.
Investors could also pick schemes from MC30 – Moneycontrol’s own curated basket of 30 mutual funds.
Financial planners say the NFO rush is likely to continue as long as stock markets are buoyant, but that investors should not get carried away.“The marketing around NFOs might create a buzz around the country or theme’s recent outperformance, to create a FOMO (fear of missing out) in investors, but they should not get swayed by this sentiment,” says Vishal Dhawan, founder and chief financial planner of Plan Ahead Wealth Advisors.