To do or not to do with new fund offers

An NFO, no matter how differentiated, may again not help much. Therefore, even if it ticks all boxes, the main question is whether adding yet another fund is really needed in your portfolio

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.

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.