Rush of NFOs: Is it a good time to invest in new mutual fund schemes?

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During high markets, the sweet experience of the existing investors lures new and novice investors in overheated markets at high risks.

It’s easier to sell equities or units of equity-oriented mutual funds in a rising market, especially near the peak when the existing investors have already experienced high gains, rather than selling in a falling market. The sweet experience of the existing investors lures new and novice investors in overheated markets at high risks.

However, to take advantage of the sentiment of amateur investors, Asset Management Companies (AMCs) come out with New Fund Offers (NFOs) while many companies launch Initial Public Offers (IPOs) or Followup Public Offers (FPOs), as the case may be.

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For example, when the BSE Sensex rose from less than 3,000 level to the all-time high of over 20,000 points in less than 4 years, as many as 28 NFOs were launched in the first quarter of 2008, when the market crossed the 20,000 level.

Most of the NFOs were soon in deep red after the index crashed to below the 9,000 level in the year 2008 itself. The novice investors lost patience within a year or two, and suffered huge losses after redeeming their investments, even as the Sensex took nearly 5 years 10 months to regain the 20,000 level.

According to a report, around 50 per cent of the NFO investors redeemed their units before 2011, thus suffering moderate to heavy losses.

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However, it seems both investors and individual distributors have learned a lesson from the 2008 episode and are more cautious in their approach this time.

According to a survey conducted by All Mutual Fund Distributors Welfare Association (AMDwA) among its members regarding – “Should Mutual Fund Distributors (MFDs) recommend NFO to clients with the markets at lifetime high?” – the majority of distributors said they won’t recommend it.

While 50 per cent of the participants in the AMDwA survey said ‘No’, another 7 per cent said ‘Absolutely No’. About 22 per cent of the participants voted for the option ‘Depends on Investment Objective (of the clients)’. While about 6 per cent voted for the option ‘At this market level, suitable NFO can be a better choice’, about 13 per cent said ‘Yes’. About 2 per cent of the participants remain undecided and clicked on ‘Can’t say.

“One should invest in an NFO only if it offers a unique investment opportunity matching financial goals and risk appetite. In case of an NFO based on any sector or theme, only those with higher risk appetite and the ability to closely track the concerned theme or sector for timing their investments should opt for such NFOs. Investors should also factor in the past performance record of the funds managed by NFO’s fund manager and its fund house before investing in any NFO,” said Sahil Arora – Senior Director, Paisabazaar.com.

“Else, investors should stick to existing mutual funds having a good track record of beating its benchmark indices and peer funds. The past performance data of an existing mutual fund would also help investors in finding out how the concerned fund performed in the previous market and economic cycles,” he added.

So, before taking a decision on investing in a new fund, consult your financial advisor to determine if it will help you in achieving your financial goals.

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