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BW Businessworld

NFOs: Why To Say No To NFOs

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launched to garner new money
which stays away from existing

Of the 33 new funds more than six but less than 12 months old on February 15, as many as 19 failed to beat either the stock market barometer, Sensex or the average category returns. For instance, while the average open ended equity diversified scheme yielded 17.79 per cent over the last six months, investments in the year-old Lotus India Contra have fetched less than half those returns. Ditto for the Reliance Equity Opportunities Inst Fund. Fund houses could argue that investments in schemes — like any other equity-oriented saving instrument — should be judged over the long term. Yet, even the six-month Sensex returns are about 21 per cent.
Even then, New Fund Offers (NFOs) are exceedingly popular. As per the Association of Mutual Funds of India, investors poured Rs 12,079 crore into NFOs in January. Money parked with NFOs grew from Rs 61,092 crore in 212 schemes in 2005 to Rs 1,94,096 crore in 1,103 NFOs in 2007. The reason being, investors tend to draw parallels between them and initial public offers (IPOs) for stocks.

The Rs 10 face value of NFOs is wrongly compared with the net asset values (NAVs) of running schemes, which is typically higher than Rs 10. In a stock price, the book value (representing the stock’s intrinsic worth) and the market price (quoted on the stock exchange) can be distinct. So, a share with a book value of Rs 50 can trade at Rs 100 depending on the market’s take on it.

The NAV of a mutual fund (MF), however, represents the total assets held by the scheme minus expenses, such as the costs of marketing and fund management. So a higher NAV is simply indicative of a higher asset value. But investors tend to go for NFOs with the misplaced belief that a Rs 10 investment cannot possibly “fall”. Little do they realise the Rs 10 value in the case of an NFO is not the same as that for an equity share.
“NFO is not like an IPO that will give you instant premium,” says Surya Bhatia, principal consultant at investment adviser Asset Managers. “I can’t think of one reason why anyone should invest in NFOs as they offer no new themes or qualities that cannot be found in existing funds. The returns on investments in the same set of stocks will be just the same whether an existing scheme makes them or a new one.”
Unlike an existing fund, which has a track record, “Investing in an NFO means betting on something that has no past record,” says 28-year old graphic designer Preeti Mathur, who relies on MFs for her retirement savings.
Many NFOs, however, sell on reputation of the MF or the fund manager. An NFO can be a good idea if it adds a new, needed dimension — tax saving coupled with potential for returns and diversification, for instance — to a portfolio. Informed decisions and a big no to being led by the herd remain the golden rules as always.
(Businessworld Issue 25 Feb-3 Mar 2008)