Over 200 schemes have been floated by various mutual funds in the past seven years. Scores of investors prefer New Fund Offer (NFO) over the existing one on the grounds of better value. However, in an investment ecosystem, a Rs 10 face value is not cheaper than the fund trading at the Net Asset Value (NAV) of Rs 20. An NFO cannot be equated with the IPO of the stock where price fluctuations can be as high as 50 - 80 per cent.
An NFO stage means that the fund house is simply collecting money that will be deployed at a later stage. This is a disadvantage because the investor cannot evaluate the portfolio quality of the fund. Living under the roof of the misconception that NFO offers a good entry point can make the investors miss the opportunity in existing funds.
When it comes to mutual fund investing, the value of NFO could go up by the same percentage as that of an existing fund. Hence, the notion that NFO could have a higher return can turn out to be erroneous.
Let’s look at how few NFOs have fared in the past two years. Mahindra Manulife Rural Bharat and Consumption Yojana launched its NFO in November 2018. The fund has consistently underperformed the benchmark NIFTY 200. Since its inception, it has managed to achieve an absolute return of 31.63 per cent while NIFTY 200 has delivered 53.69 per cent. Investing in Quant Consumption Fund would have given one an absolute return of 122 per cent.
Similarly, IDBI Long Term Value Fund, which was launched in August 2018, has given an absolute return of 55.20 per cent while IDFC Sterling Value Fund has delivered 102 per cent in the same period.
If we consider some of the latest NFOs, the picture is no different. For example, Quant Quantmental Fund, launched in April 2021, has been underperforming the NIFTY 500, delivering 10.06 per cent absolute return compared to NIFTY 500’s 13.08 per cent.
Similarly, Tata Dividend Yield Fund launched in May 2021, underperformed the benchmark BSE Sensex by a wide margin. If the same amount had been invested in Aditya Birla Sun Life Dividend Yield Fund, the returns would have been much higher.
In the short run, NFOs can be a risky bet. For example, ICICI Prudential Flexi Cap Fund. Launched in July 2021, the NFO has underperformed its benchmark, even though it is too early to judge.
Thus, investing in an NFO does not always come with decent returns.
It only makes sense if the fund is entering a new theme. Mirae Asset’s FANG theme falls in this category, where the funds have a sound mix of a portfolio that offers value for money.
The author is Founder- Investonline.in