Did the Latest NFOs Make Money for Investors?
Nov 13, 2019

Author: Divya Grover

Did the Latest NFOs Make Money for its Investors?
(Image Source: Image by rawpixel from Pixabay)

The Indian mutual fund industry's asset under management (AUM) is at an all-time high at Rs 23.13 lakh crore as on October 31, 2019. For 65 consecutive months the number of folios (accounts) rose to reach 8.63 crore at the end of October.

With India's ambitious target of transforming into a USD 5-trillion economy by 2025, the financial markets are likely to rise in tandem. Thus, investors are showing confidence in mutual fund industry even as the equity markets have been volatile since the beginning of 2018.

This could be the reason why various mutual fund players have been launching new schemes. Since the beginning of 2018, 192 schemes were launched (excluding Fixed Maturity Plans, Capital Protection Funds and Interval Funds), of which 105 were launched in 2018. The combined first portfolio AUM of all these schemes was Rs 20,000 crore.

[Read: Should You Invest In A Mutual Fund Scheme Looking At Its AUM?]

Let's see how these funds have performed till now...

Table: Performance of new schemes launched since January 2018

Average Returns (%)
Category 1 Month 3 Month 6 Month 9 Month 1 Year
Equity
Market cap Fund 5.34 9.15 5.23 10.46 8.10
Value Fund 5.29 8.10 6.60 11.02 10.78
Focused Fund 6.37 9.82 8.96 13.5 12.9
Thematic/Sector Fund 4.93 7.37 5.87 9.41 9.32
Hybrid
Aggressive Hybrid Fund 4.21 7.81 9.18 12.83 15.28
Arbitrage Fund 0.40 1.41 3.22 4.95 6.39
Debt
Corporate Bond Fund 13.98 10.66 10.93 10.21 10.51
Liquid Fund 4.94 5.30 5.80 6.16 6.16
Overnight Fund 4.84 5.06 5.41 5.72 5.93
Returns are Absolute - Direct plans considered (for 192 schemes excluding Fixed Maturity Plans, Capital Protection Funds and Interval Funds)
Data as on November 12, 2019
(Source: ACE MF)


Mutual fund houses launched schemes across categories during this period. Market-cap funds witnessed the highest number of launches predominantly in the small, mid, and multi-cap category. Small and mid cap stocks have been beaten down sharply due to various macro-economic factors. Thus, fund managers believe that this could be a good entry point for picking stocks with healthy long term potential.

[Read: Does It Make Sense To Continue SIP-Ping Into A Small-Cap Fund Now?]

Sector funds saw a good number of launches, especially in the Consumption and Healthcare segment. While the consumption sector is grappling with low demand from both rural and urban areas, the healthcare sector is facing compliance issues and pricing pressures. The new launches in these sectors could mean that the respective fund houses are hopeful of revival.

[Read: 'Consumption Funds' -- Has India Lost Its Appetite For Consumption?]

In the debt category, most launches were in the Overnight funds. Debt mutual fund investors have been cautious after it came to light that many funds have exposure to toxic and downgraded debt papers. Since then, debt investors have found solace in less risky and low volatility funds like Overnight funds.

[Read: Liquid Funds v/s Overnight Funds: Where To Park Your Short-Term Money?]

Should you invest in NFOs?

Although some of the recently launched schemes across categories have performed well during their short track record, ideally performance of at least three years must be assessed for equity schemes to determine its worthiness.

When you invest in a NFO, a reliable track record of the fund's performance, portfolio quality, risk-return profile, etc. that will help you determine if it is a worthy scheme for your portfolio is non-existent. Due to the lack of this information, you have to rely on the efficiency and track record of the fund house.

Often, new funds are launched when the investor sentiments are high, such as during a market rally. This limits the fund manager's chances to pick stocks at bargain price. Timing of NFO launch becomes even more crucial in case of sectoral and thematic funds.

It is important to check the investment mandate of the product being launched. The product should be suitable for your risk appetite and investment horizon and must enable you to realise your goals.

[Read: Why You Should Be Careful About Investing In NFOs]

SEBI has mandated that a fund house can launch only one scheme per category. However, this restriction is not applicable on close-ended schemes. Mutual funds saw this as a way to grow their AUM through NFOs in close-ended schemes.

But here is why you should avoid close-ended schemes...

  • Investment though SIP mode is not available

  • You cannot redeem the scheme even if they underperform

  • Close ended schemes are listed on stock exchanges, but due to low liquidity of such schemes it becomes unviable at times to buy or sell

  • Close-ended schemes operate at higher costs as compared to the open-ended schemes

[Read: Will SEBI Shut Down The Close-ended NFO Factory?]

As an investor, you must avoid timing the market and stick to your personalised asset allocation plan irrespective of market conditions. Invest in fund houses that are prudent asset managers and not mere asset gatherers. If you have invested in an NFO make sure to review the performance of the scheme periodically and assess whether it will take you on the path to achieve your goals.

Editor's note: 

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Graph 3: Risk-return spectrum

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