Navigating the coming wave of new fund offers
CAUTION AHEAD Though lucrative, these should not occupy more than 10-20% of your overall portfolio
In the last one year, around 30 actively managed mutual funds worth `5,600 cr have been launched. And there are two unique aspects about these funds. First, they came in quick succession. Second, unlike in 2006-07 and 2007-08 this time around there has been a deluge of closed-end funds—which constitute around 80-90% of new funds launched in the last one year.
Beside making sense for the managers these newly launched funds have been doing very good for the investors also. A look at the last three months across 17 funds shows an average return of 27%. However, before you jump the gun and take up just past returns as a benchmark for the future, you have to consider the logic of investing in a new fund offers (NFO).
A number of the recent NFOs focus on a specific theme or segment in the market, which may not be available to you through existing schemes. For example, IDFC Asset Management Co. Pvt. Ltd launched a three-year closed-end fund with a focus on companies beyond the top 200-250 in terms of market capitalization. The idea was to limit the size of the portfolio and manage a more focused one which could not be done with its open-ended smalland mid-cap fund.
“When we launched funds we focused on small- and mid-caps before the cycle turns. Launching the fund in a timely manner meant building the portfolio while stocks were still undervalued and investors could also partake that experience,” said Nimesh Shah, managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd. If an NFO brings to the table a unique opportunity which you can’t capture in an existing fund, then it’s something to look forward to, else avoid. Closed-end schemes with limited portfolio size give you a tactical opportunity. At present there is a pre-emptive opportunity in the market as economic activity and policy direction suggests that the corporate earnings cycle could be at a turning point. A number of the new launches are targeted to take advantage of this turnaround, specifically mid- and small-cap companies. “Fundamentally, we don’t want to have too many products as it creates confusion. NFOs present tactical opportunities which by nature are not perpetual,” said Kalpen Parikh, chief executive officer, IDFC AMC.
These schemes make it easier for fund managers to take bold calls on small- and mid-cap companies without challenges of liquidity management. Hence, today’s NFOs are more for a tactical part of your portfolio which you indulge in for a limited period, rather than for creating long-term exposure in equity.
A big risk when it comes to NFOs is that they don’t come with a track record. “Investors will have to rely on the scheme information document and should have a fair knowledge of markets to get an idea of where the fund will invest,” said said Vidya Bala, head-mutual funds research, FundsIndia.com.. It’s easier if the fund manager of the new fund is known and has a good track record. Then there is the bigger risk of timing the market.
To tide over this issue, many fund houses have relied on a strategy of declaring frequent dividends as a means of profit booking and sharing it with investors. A defined term helps calibrate entry/exit points better for investments resulting in a better investor experience. Nevertheless, having a specific entry and exit date is like timing the market and dividend payouts, too, can’t be planned in advance. “Dividend payout is a function of price outlook,” explains Parikh. Which means it’s not fixed and there could be times when you will get a payout which is lower.
The structure of the recent NFOs is shortlived and opportunistic. Don’t sell existing funds which you have picked for the long term to invest in these. Moreover, if you are a first-time investor, excited by after the recent rally, these NFOs should not be your starting point; go for a well-established fund with a long-term performance track record.
If you are an existing equity investor, these funds may give you the opportunity to make returns beyond what the top 200 listed stocks can offer.
But remember to apportion only 10-20% of your overall equity portfolio rather than shifting your entire focus to such funds and be ready to be invested in them for only a period of 2-3 years.