Many distributors push for NFOs as they receive slightly higher commissions. The usual sales pitch is either about the fund manager as a star performer or the distributor luring investors with the rationale of the scheme launch being perfectly timed with the current market scenario. Another unique selling proposition is that the NFOs are cheaper than the existing funds. Investment advisors, therefore, say that an NFO is best avoided unless it has a unique proposition.
Say, a fund house is launching a large-cap, small-cap fund or a hybrid fund, it’s best to avoid it. Instead, opt for a fund that has been in existence for three years. NFOs don’t have a track record. In an established fund, there are many data points that can help investors to evaluate a scheme. An investor can look at the history and how the fund manager has tackled the different market scenarios.
NFOs make sense if there is a unique concept or theme from a fund house. “It can be a unique investment approach or a theme that you are convinced would do well. But before you invest, do compare whether the existing funds serve the purpose,” says Vidya Bala, head of mutual fund research at FundsIndia. A few fund houses, for example, tried to use algorithms to select stocks on qualitative parameters such as price-to-earnings, price-to-book, and so on. But none of them succeeded.
Similarly, fund managers running large-cap or multi-cap portfolios usually capture the existing theme in the market and invest in the stocks that are in flavour. When the information technology sector started doing well a few months back, most diversified funds added those stocks to their portfolio. “It’s best to wait for a year and see how the new fund has performed and then enter it. It takes at least a year for the fund manager to build the right portfolio,” says Bala.