Earlier this month, ICICI Prudential Flexicap new fund offer (NFO) collected around Rs 10,000 crore. This was the highest-ever NFO collection in the history of Indian mutual funds (MF). So far this year, MFs have already launched 73 NFOs, which have collected roughly Rs 16,000 crore, according to data from Value Research.
Fund houses have turned into supermarkets. You’ll find a variety of products on their shelves. The question is: how should you pick the right NFO that suits you?
A tsunami of NFOs
SEBI’s scheme re-classification exercise in 2018 led to many fund houses coming out with NFOs in CY2019 to ‘fill the gaps’ in which they were not present. These included index and exchange-traded funds (ETFs) and thematic schemes. The Change in multi-cap funds’ investment mandate and the emergence of flexi-cap category has also necessitated the launch of NFOs in the last few months.
“We have launched only those products that serve a specific purpose or are relevant over long periods of time when it comes to asset allocation needs of the investors,” says A. Balasubramanian, MD and CEO, Aditya Birla Sun Life AMC.
Says Swarup Mohanty, CEO, Mirae Asset Investment Managers (India), “As markets become more efficient, the alpha generating possibilities for actively managed products decrease. We have offered actively managed products in select categories and we intend to offer thematic passive exchange traded funds, which will cater more to young investors’ needs.”
Five of the seven equity funds launched by Mirae Asset India since the beginning of 2020 till date, have been passive schemes.
Targeting new segments
Mutual fund houses have been quick to spot opportunities. In 2014, to capitalise on the stock market rise on the back of the the Narendra Modi-led government being elected, fund houses launched closed-end funds. In 2014, as many as 56 out of the 86 new equity-oriented schemes launched were closed-end.
But soon equity markets fell flat, as corporate earnings didn’t catch up. And a narrow equity market rally followed where only a few stocks did well in the exchanges. This led to many diversified, especially large-cap, schemes, underperforming. Post SEBI’s 2018 re-classification, fund houses started to launch thematic funds. Between 2018 and now, there have been 40 thematic funds rolled out.
On the debt funds side fewer fixed maturity plans have been rolled out. Similarly, smart beta funds have also caught the fund houses’ fancy.
“Whenever markets do well, barring a few fund houses, most find it easy to roll out products. It has happened in the past and is expected to happen in future since they are profit seeking enterprises,” says Amol Joshi, founder of PlanRupee Investment Services. Investors need to stay the course and not fall for these.
Steps to select the right NFO
New investors can avoid NFOs. Your first set of schemes must be those that come with a long-term track record.
Mohanty says, “a goal-based investing approach will cut all the noise.” Choose schemes that suit your goals and investment horizons. Gauge based on your risk appetite and surplus.
Avoid duplication. Avoid schemes with similar holdings. So far in 2021, nine large-cap, three mid-cap and one multi-cap funds have been launched. Existing investors may already hold such schemes.
From Monday, DSP Mutual Fund has started promoting an existing scheme, DSP Flexi Cap, as an ‘Old Fund Offering’. This scheme has been around since 1997.
Nitin Rao, CEO, InCred Wealth says, “In most NFOs, there is little differentiation. Investors should consider investing in an NFO if it brings in value addition such as differentiated investment strategies focused on international investing or factor-based indices.”
Let’s say a new equity fund has just been launched. You have money to invest in it. But if you need your money back in two years, the fund may not suit you. Equities are meant for a holding period of at least five years.
Avoid blindly picking the best theme or the highest returns offering scheme. Many closed-end funds did not make significant returns by the time their tenure came to an end. Therefore, many had to either extend their term or become open-ended.