I invest in mutual fund schemes after studying their long-term performance record. But what should be the factors to look for in case I want to invest in an NFO?
— Ajay Kumar Rastogi, Bhubaneswar
Investors rush to invest in NFOs because of two basic reasons. Firstly, they think that with an NAV of Rs 10, the new fund is cheaper than existing mutual fund schemes. Secondly, they want to invest in the NFO to diversify their portfolio.
The first reason is incorrect. On any given day, a fund priced at Rs 10 is no cheaper than one priced at Rs 100. That’s because they buy the same stocks at the same price from the same market. The second reason is only partly correct. Mutual funds are diversification tools but there may be no difference between an existing large-cap diversified fund and a new one. Here are five things that an investor must consider before investing in an NFO.
I. TRACK RECORD OF FUND HOUSE
A new fund does not have a performance history. But the mutual fund house would certainly have. Look at the performance of existing schemes of the fund house. But consider schemes from the same category as far as possible. It will not help to look at the performance of debt schemes if the NFO is a balanced fund or an equity scheme.
In case the fund house itself is new with no existing schemes, check out the credentials of its promoters. Fidelity Mutual Fund entered India in 2005 but its global pedigree was well known.
II. INVESTMENT OBJECTIVE
Every scheme has a different asset allocation which determines its investment objective. Investors should assess whether the investment objective of the NFO matches with their own. A risk-averse person should not invest in a mid-cap fund. Someone looking for long-term growth should steer clear of bond funds and balanced schemes.
III. WHAT’S NEW IN THE OFFER
Check out whether the NFO is offering something that differentiates it from existing schemes. There is little point in investing in a fund which will be exactly like any other fund in the same category. There are several common shares in the portfolios of the top 10 diversified equity funds. Invest in the new fund only if it offers something new (capital protection guarantee, for instance).
IV. LOADS AND EXPENSES
There is no escaping entry loads in case of equity-based schemes. But more than entry loads, you need to watch out for exit loads. Some funds slap an exit load if the investment is redeemed before a certain period. Also check out the expense ratio of the fund and compare it with that of other similar funds.
V. SCHEME SPECIFIC RISKS
If a new fund aims to invest in the overseas market, an investor has to bear the country and currency risk in addition to the risk associated with the assets it would invest in. A bond fund bears the interest rate risk while an equity fund is subject to stock market risks. Check out the risks associated with the NFO before investing.
