The markets are down, and investors are busy buying the dip. Mutual fund companies feel that the time is ripe to introduce new fund offers (NFOs) post the ban put in place by the Securities and Exchange Board of India (SEBI) on NFOs that ended on July 01 this year. Post the ban, five mutual fund houses had filed for new offers with SEBI.
The NFOs that would be floated across all market caps and investment options including Axis MF that has filed for a long bond fund, Franklin Templeton MF that is coming out with a new balanced advantage fund, LIC MF plans to come up with a multi-cap fund, and so on.
While many asset management companies are yet to launch their NFOs soon, WhiteOak Capital Mutual Fund is already with its first equity offer of WhiteOak Capital Flexi Cap Fund, an open-ended equity scheme that puts investors’ money across large-cap, mid-cap and small-cap stocks. The fund offer is available from July 12, 2022 to July 26, 2022. The investors subscribing to the scheme would have access to a well-diversified portfolio investing in various companies across various industries, sectors and market capitalization.
The idea is to raise money from the public for investment and that is why those interested in investing are issued purchase units of the new scheme at ₹10. The new scheme is listed post subscription for all others to invest in. However, those who had missed invested during the NFO will now have to buy units at the net asset value (NAV) declared by the fund house.
Investors are anticipating a bull run in the near run after this prolonged lull during which most stocks went down with some even reaching their 52-week lows. The hope of being able to cash in on the surging market prompts many investors to park their money at such low NAVs.
Many investors put their money in NFOs hoping to get units at lower prices. However, is the availability of cheap units enough reason to invest? Investors must refrain from blocking their money into such randomly introduced investments at such an early stage. Analysing a scheme before deciding to invest in it is important. More than the price, it is the performance that matters. A low face value need not translate to sustained performance. A comparison of both short-term and long-term returns highlights how many mutual funds are unable to fetch returns that beat inflation; forget competing with most other mutual funds that have raced ahead to create wealth for their investors.
Also, you must check if the NFO is being offered for an open-ended scheme or a close-ended scheme. While you can enter and exit an open-ended scheme at your will, this benefit is not available with closed-ended schemes. If the scheme is closed-ended, you will have to continue with your investments till the scheme matures.
Deciding factors for NFO investments
Like most other investment options wherein you are keen to learn about their asset allocation and their schemes. Knowing what this scheme is into, and why you want to invest are important factors that you must not discount before putting your money into anything. Also, you must be conscious of your risk appetite and long-term needs before investing in any NFO.
Check for necessary information including the fund manager’s profile, investment strategy, returns on other funds by the same fund house, the quantum of risk involved and the level of liquidity of the fund. While you may argue that past performance cannot be the sole parameter to determine future returns, you must look at it as an essential parameter too. Look at the exit loads so that you do not end up paying extra on fund redemption within a year or before.
Asset allocation matters
There is a lot at stake when it comes to the choice of investments. This means that you must be aware of the asset allocation by the asset management company. Check how much percentage of the investment would be put into equity, debt and other instruments. If you are someone with less affinity to volatility, it makes sense to avoid focused equity funds. Similarly, if your idea is to create wealth by staying invested in equity mutual funds for a decade or more, you must be willing to put in your money accordingly.
The AMC’s investment style will tell you a lot about the strategy that it is contemplating. Be sure to read the document in its entirety. Read between the lines to get a good grip on how the fund management company intends to perform in the long run. Sector agnostic mutual funds come with a safety valve as their performance does not rely on how a particular sector performs. Also, it prevents investors from being dependent on the performance of its assets that would perform during a particular cycle only. Check if the fund adheres to a sectoral theme or is independent of such constrictions restricting its scope of diversification and performance.
Wait for the fund to perform
The introduction of mutual fund houses coming up with NFOs is a sign of a growing economy and investors’ faith in it. However, this optimism may not be enough to put money in all the new NFOs hoping that some of them will strike gold. Instead of rushing to put your earnings in a new NFO, wait for a year to check how it is performing. It serves better to invest in an existing scheme with a proven track record at higher NAVs than push your money into something you are unaware of.
Some investors check the fund manager’s profile before investing their money hoping that they would be able to repeat their performance with other funds. In that case, you can invest a small amount in the NFO and wait for around six months to a year for the fund to perform. Continue with your regular and subsequent investments, if the fund performs well in future too.
Not all NFOs may be worthy
A big fund house launching an NFO may not be enough reason for you to invest. You can take interest in the fund and track its returns over a period, but do not jump into it unless you are sure of why you are investing in it. Trying to avail the benefits of cheaper units may have a bearing effect on your future returns.