Sixty five. That’s the number of new fund and ETF launches since July, a span of just 3 months. The 2021 calendar, too, was peppered with NFOs (new fund offers) with 132 funds coming into the fold.
Many of these NFOs sound impressive or claim to be following differentiated strategies. More, a particular trend in the current crop of NFOs is that of passive launches, mirroring anything from a momentum-based index to value to good old mid-caps or small-caps. It’s easy to be tempted – or bewildered – by this spate of new funds. So, here’s how you should approach an NFO.
Run of the mill funds
Remember that there are specific categories for equity, debt, and hybrid funds, and an AMC can have a fund for every category (or more than one, in some categories). Therefore, many NFOs are simply AMCs launching funds because there’s a category where they do not have a fund yet. The newer AMCs, too, have plenty of ground to cover. And so you can see NFOs in the flexi-cap or focused space, or in gilt constant maturity, money market category, mid-caps and so on. By and large, these funds don’t need your attention. They are primarily AMCs bridging the gaps in the product line-up.
In an NFO, remember that you have no track record to judge the fund. You do not know if its strategy has helped it beat markets or peers consistently and across market cycles. You don’t how volatile or risky it can be. You don’t know its portfolio or how it picks stocks or debt securities. All this is important if you are to know if a fund is worth investing in and if it suits you.
Further, note that these categories already have a variety of funds. It’s perfectly possible to pick a fund with an established track record, where you can understand consistency in performance, strategy, and suitability. Given the current wide range of funds in most categories, it’s rare that you will find an NFO that’s truly differentiated in what it does – which, in any case, will be clear only after it gathers some record of portfolio or performance.
For these NFOs, thus, it’s best to wait. Understand how it builds its portfolio and how it returns before going for them. After all, these are open-ended funds and you can invest in them any time. You gain no advantage in an NFO over other funds. You can always afford to watch performance and add it later to your portfolio if an NFO trots out top-notch performance.
The only area where this may not apply is sector or thematic NFOs. For sector funds and those based on specific themes such as consumption or manufacturing, timing is important. Past performance is also less of a concern here as sectors run through cycles. You also know more or less where the fund will invest. A new fund, therefore, may return handsomely if the timing works and it makes the right picks – though it is still riskier to take a call on a fund with no performance record. The pedigree of the AMC in its other funds can be of some help here to take a decision.
The passive question
The lack of performance data is not a concern with passive funds, which aim to mirror a specific index (debt or equity). Since index information is usually available, you can check various factors such as volatility and performance, as well as index composition.
But the passive game, too, has grown in complexity! No longer are the index funds and ETFs simply based on plain-vanilla indices. Recent NFOs have primarily been built on ‘factor’ indices or thematic indices which aren’t all that simple to understand or easy to include in a portfolio and maintain.
That means you shouldn’t go for an NFO just because it is a passive one and do not assume all passive funds are good. The call depends on the underlying index. It’s easy for the main market indices such as the Nifty, Sensex, Nifty or BSE 500 or the Nifty Midcap 150 and so on. However, for index funds built on other aspects, it becomes important to check whether that index offers better returns or better opportunities than these main indices.
For example, consider factor indices. These indices use some metrics to measure specific aspects of a stock such as low volatility or quality or value to decide the composition of the index and weight of a stock. These factors may sound great, but the index could in reality be worse than the plain old Nifty 50! They could work in some market cycles but not in others. They may call for a more tactical approach than a long-term one.
Therefore, where the passive NFO is based on a different index other than the primary market indices, run a check on the underlying index before taking a call. An additional caution is needed for ETF NFOs, as your returns will depend on the liquidity of the ETF.
Do you need it?
Holding a large number of funds does not help your portfolio and makes it harder to manage. Your portfolio may also already be adequately diversified, and an NFO, no matter how differentiated, may not help. Thus, even if an NFO ticks all the boxes, ask whether your portfolio really needs another fund.
(The writer is co-founder, PrimeInvestor.in)