There are over 12 new fund offers (NFOs). “Should I invest in this NFO” is a common query we keep getting. Here are some things you need to keep in mind before investing in NFOs.
There’s an old quote by Benjamin Graham that’s relevant to discussions about NFOs:
“The investor’s chief problem - and even his worst enemy - is likely to be himself.”
1. Should you invest in NFOs.
The answer is almost always NO. As a matter of fact, It doesn’t matter if it’s a new fund or an old fund; in almost all cases, you don’t need another fund in your portfolio.
Even if there’s a valid use for a new fund in your portfolio, there’s almost always an old fund with an established track record as an alternative. It’s very hard to judge how new funds will perform.
We keep hearing anecdotes from AMCs and advisors about investors with 20-50 funds in their portfolios. In a lot of cases, NFOs are the culprits.
Banks and other intermediaries push people to churn their portfolios and invest in NFOs, because they get higher commissions.
The other famous sales pitch for NFOs is that the units are cheaper since they are priced at Rs 10. That’s misleading. Rs 10 is just a number and doesn’t mean anything.
The quality of a fund depends on its portfolio, strategy, fund manager, and investing philosophy.
2. The allure of new thematic funds.
The lure of thematic NFOs is very strong. Investors often look at past returns of a theme and invest in the funds. But at the risk of repeating the obvious, past performance doesn’t indicate future performance.
These themes are sold based on juicy stories of future growth, innovation, disruption, and other buzzwords that are often meaningless. As we recently wrote: investing based on stories will always get you in trouble.
In fact, if a theme has run up a lot in the past, the odds are it will underperform in the future. More importantly, themes and sectors are cyclical, and you need the ability to time them. They can go a long time underperforming the broader market.
If you still wish to invest in such funds, make sure your core portfolio is invested in large and mid-cap funds. You can have a small allocation to such themes and sectors in your satellite portfolio.
Think of this as a behavioral release
Stay informed, invest wisely, and Happy investing!