Financial Planning mantra #5

Invest in New Fund Offers (NFOs) of mutual funds ONLY if there is something really very unique about them or it is the first of its kind. Even then, evaluate before you invest.

Each time a NFO hits the market you are bombarded with great flyers, posters, ads and presentations to convince you that this is the right time to invest. As an advisor, I have kept away from most ‘me-too’ NFOs. But I must humbly admit, in my initial days, I too failed to realize the ‘disguise’ in a few NFOs. Thankfully, I could not muster more than a handful of clients (some of whom themselves came forward) to invest in them, probably because somewhere in my mind I was not fully convinced. Today, three-and-a-half years and over 100 NFOs later I am a much wiser man. At all NFO-distributor meets, I pull out all stops to ask all wise and foolish questions. Because till the time I am fully convinced, I should not be taking it to my clients.

The only ‘plus’ point in any NFO is that ‘they do not carry any deadwood’ (as a friend of mine puts it).

Two major why investors fall for NFOs are:

- Most people equate a mutual fund ‘unit’ with that of a ‘share’ and consequently believe that a fund with a Rs 10 NAV is cheaper than that with a NAV of Rs 50. In mutual funds, there is no difference. In fact, a fund with a higher NAV is better, in the sense, it is more ‘experienced’. Of course, this cannot be applied as a blanket rule while choosing funds.

- Aggressive ‘selling’ (because of higher commission rates) by the banks (through ‘financial advisors’ and ‘relationship managers’) and individual distributors

Of late, I have noticed fund houses coming out with NFOs to shore up their AUMs (assets under management). Incoming money into equity funds had almost dried up from mid-2008 through the first few months of this year. With huge drop in share prices, the AUMs of all funds came down drastically. With sentiment improving, the last two months has seen fund houses ‘putting old wine in new bottle’ so that they can collect a few hundred or thousand crore (which would not happen under normal conditions).

The fund houses claim that the one of the purposes of a NFO is to grow the low base of retail investors (from 2%). But this logic is beyond my realm of understanding. If they really wanted more investors, they should focus more on their existing funds and show higher returns rather than just trying to mop up money in the name of growing the market. Look at it logically:
- Any one putting in money into an NFO would in all probability be an existing investor in mutual funds.
- A new investor (with no past experience in mutual funds) would come in only if he is made to believe that a Rs 10 NFO is cheaper. So he is made to start off on a false premise. It is not going to be long before he feels ‘cheated’ and vanishes forever.

Today NFOs have become a money mopping up exercise. Almost all kinds of permutation and combinations of funds are already there in the market (the only thing that is still not there is a ‘Silver ETF’).

A fund manager recently lamented that the size of the entire MF industry is less than one month’s of domestic savings. It is bound to be till fund managers and AMCs realize that the way to grow the size of this industry is to record higher and better performances of existing funds (thereby attracting fresh and new retail investors) and not by bringing out NFOs.