New Fund Offers: Cost Advantage To Fillers — Key Mutual Fund Investment Decisions
New fund offers by mutual fund houses present investors with opportunities to invest in spaces with promising potential. But, do these NFOs offer time or cost advantage to investors?
More than 100 new fund offers have been launched in 2024 with all calling investors to believe in the potential of the space they are venturing into. However, investors as well as mutual fund managers, have different approaches to NFOs. While some prefer to steer clear because there is no past performance data to rely on, others are more risk-taking.
In other words, while for some, there is much uncertainty in the performance of such schemes, other investors believe in the potential of the space as NFOs are seen as opportunities to get into the space and capture the possible upside.
We look at some key aspects to consider while considering such an investment:
Do NFOs Have Timing Or Cost Advantage?
Investors often buy NFOs to capitalise on the cost advantage that many believe these offer. But financial planners say that NFOs fail to offer any significant cost advantage at all.
"One can say NFOs have not cost edge at all," said Santhosh Joseph, founder and chief executive officer of Germinate Investment Services LLP.
The cost advantage depends on the money the NFO collects. The increase in the value of shares will also depend on the performance of the fund.
"The value of the NAV does not guarantee the performance of the scheme," said Joseph. The performance depends on the fund manager and the time taken to build the portfolio, according to him.
When it comes to the time impact of NFOs, the deployment of cash for an NFO might take longer than broader funds, Joseph said. This means that after the collection period is over, fund managers gradually deploy the funds.
Other existing schemes in the space might have already deployed their funds, which reduces the time and cost advantage of NFOs as well.
As far as time advantage goes, investors who truly believe in the potential of a sector would prioritise staying invested as the the larger goal than an early entrance, Joseph said.
Watch Out For Filler NFOs
There are two ways of looking at NFOs, according to Varun Fatehpuria, founder and chief executive officer of Daulat Wealth Management.
Some new fund offers could be built to fill a product gap, he pointed out.
This means that some schemes might be launched by fund houses to simply cover certain spaces that they do not have products in. Essentially, these funds may be launched to fill their product basket better and to spread their offerings across sectors.
These fund offers may end up having a small universe to invest in or may only be profitable for a certain period of time.
Review Your Portfolio First
The second approach applies to investors who still believe in the potential of the space despite the risk.
“Check if your portfolio has space for an NFO,” according to Fatehpuria.
With NFOs available across categories, it is important for investors and fund managers to not just invest in the flavour of the season, but to discern if the fund fits the investor's portfolio and aligns with their goals.
For instance, investing into funds with short term gains, paired with high volatility, will not work for an investor whose priority is to protect their principal and stay invested.
Who Should Invest In NFOs?
Getting into new fund offers without proper planning may bring a lot more risk than the investor’s portfolio is equipped to handle.
“These products are for investors who are veterans in the mutual fund industry,” said Juzer Gabajiwala, director of Ventura Securities Ltd.
Understanding what is different in the new fund offer when compared to the funds that are already available in the space is important, according to Joseph.
NFOs might simply differ in strategy or cost when compared to schemes that are already available in the market. An investor needs to be familiar with fund managers and their investment strategies to anticipate the performance of the scheme.
