How many times have we been warned that those who forget history are condemned to repeat it?
But somehow mutual fund investors have ignored this warning, going by the increased collections reported by new fund offers (NFOs) in the last few months. In Oct 09, mutual fund houses collected Rs 6,270 cr worth of NFO money in just 15 schemes compared to Rs 7,004 cr by over 68 NFOs in Oct 08. What is even more surprising is how fund houses with no previous track records are getting positive response to their new offers.
Though the increasing participation in equities is a positive sign for a country where less than 3% of the population invests in the markets, the preference for NFOs is disturbing. Assets under management (AUM) of fund houses have almost doubled in the past year, mirroring the craze for NFOs during the previous bull-run.
So why should one be cautious of NFO’s?
NFOs are not cheap
New fund offers are anything but cheap. Investing in them is like paying for something without knowing its worth. The common belief is that subscribing to an NFO at its face value (NAV of Rs10), returns are much higher as compared to investing in an existing fund with higher NAV. In reality what matters and is usually overlooked is the percentage return on investment. NAV is simply the cost you incur to purchase the units of a mutual fund. For example, let us compare two infrastructure equity funds of SBI and TATA Mutual Fund:
| FUNDS | NAV | ||
| 15-Dec-09 | 15-Dec-08 | % Returns | |
| Tata Infrastructure Fund (G) | 31.82 | 18.6 | 71.07527 |
| SBI Infrastructure Fund (G) | 10 | 6.03 | 65.83748 |
As we can see, Tata Infrastructure fund gave higher returns even though it was purchased at a higher NAV.
No proven track record
The longer a fund has been in the market, the safer it is to invest in. Its longer track-record of returns, the investment style of its managers, its risk ratios, etc help an investor judge the mettle of a fund. An NFO offers no such scope of research and analysis before a purchase decision.
| FUNDS | NAV (16-Dec-09) | 3 year
return (%) |
Launch date (NAV Rs 10) |
| JM HI FI | 5.35 | -21.17 | Mar-06 |
| 9.84 | -11.82 | Aug-07 | |
| Fortis Future Leaders | 7.85 | -9.04 | Apr-06 |
| JM Emerging Leaders | 8.02 | -8.32 | Jul-05 |
| DBS Chola Contra | 9.43 | -6.24 | Feb-06 |
| Fortis Opportunities | 17.55 | -4.92 | Mar-05 |
| DBS Chola Multi Cap | 17.13 | -2.92 | Jan-05 |
So are all NFO’s bad?
Today, investors have the luxury to pick and choose funds that meet their investment needs. They can utilise various tools to judge a fund’s risk profile, management style and performance to take the right decision.
NFOs are more risky than existing schemes as it is always better to have a track-record to fall back on. If an NFO provides you with the kind of exposure you looking for and has substantial growth potential, then go ahead and invest. But do so, not because your friendly neighbour or your financial advisor thinks it’s a bargain.
Hello! Top blog you have right here! Did you know that this particular page (http://blog.valuenotes.com/srujani/the-nfo-trap) wont load in Chrome? Bizzare! Anyway I have switched over to IE now so can write this comment!……….Thankyou for the great post on The NFO Trap » Let's Talk Money- it’s what i was searching for. Im going to add you to my blogroll at http://www.holiday-home-insurance-experts.co.uk/
……..ps-I tried to signup to get the rss to my email but it did not worked. Could you add me please? jodie44@hotmail.com
Hello mate. I am still very new in blogging and the entire aspects around this field. There are many jargons I still don’t understand. I’m not pretty sure I can blogging half decent to yours. I am gonna read the whole site maybe I will be able to feel your writing style a little.