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Should you go for that Shiny new mutual fund?

If the fund is just another diversified equity fund or another short-term income plan or balanced fund, it’s unlikely that the strategy itself will be a differentiator.

A new fund offer can be very tempting to make a fresh investment. Asset managers have new fund offers to start fresh schemes under a new strategy. Usually all the literature and back testing experience around such NFOs shows the strategy in a very positive light. Is the back tested (testing a financial strategy based on data generated in the past) success of a strategy good enough reason for you to invest in an NFO?

New fund offers come at a price or what’s called as the net asset value (NAV) of Rs 10. This is another factor that may tempt you, buying a security at a low price. However, the absolute value of the NAV is irrelevant in defining the potential future return.

What about existing schemes?

Over the last 25 odd years, the mutual fund industry has grown substantially with slightly over 400 different open-ended equity-oriented schemes, nearly 350 open-ended debt schemes and 175 open-ended hybrid schemes to choose from. Among this selection you can find schemes with varying degrees of risk, schemes which are diversified and those which cater to different themes, sectors or strategies and a variety in scheme size and fund manager too.

Many of these schemes come with a good track record of performance and consistency in fund management. Some have over two decades of such a track record. Given the kind of options available within existing schemes, it makes sense to invest in a new fund offer only if it comes with a unique strategy.

If the fund is just another diversified equity fund or another short-term income plan or balanced fund, its unlikely that the strategy itself will be a differentiator. Moreover, the asset manager too will have existing schemes across equity and debt to pick from. It’s wiser to stick to an existing fund from an asset manager whom you prefer rather than go in for an NFO.

What about the low price?

New fund offers come at a price or what’s called as the net asset value (NAV) of Rs 10. This is another factor that may tempt you, buying a security at a low price. However, the absolute value of the NAV is irrelevant in defining the potential future return.

The net asset value of a MF scheme is essentially the collective value of the scheme’s assets less its expenses (and liabilities if any) expressed per unit. An NFO is offered at Rs 10 and then once the money collected is invested in stocks or bonds, the aggregate market value is calculated, and the first NAV released. This first NAV post NFO period can very well be below Rs 10 especially in case of equity funds. 

The returns from a fund don’t come because of this NFO price. Returns are a factor of how the chosen stocks and securities in the fund portfolio perform over a period of time. A positive performance will contribute to positive NAV growth and vice versa regardless of the current NAV being Rs 10 or Rs 50 or Rs 100.

NFOs are more relevant for the asset manager as they introduce new products to build their offering for investors. It is prudent to wait for a new fund to complete at least 3-5 years of performance history before you think of investing in it.

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