8 factors to look at when investing in a New Fund Offer

In the last few months, mutual fund houses have launched a variety of New Fund Offers. The difference between a NFO and an existing mutual fund scheme is that in a NFO you can buy the units for Rs 10, while in the existing fund you purchase the units at the Net Asset Value (NAV). The NAV of an established fund is higher because it is earning returns from the funds that it has already raised and invested across asset classes. These returns are passed on to investors in the form of the NAV.

A NFO is also open for a limited time, due to which investors often rush to invest in it. But unlike an existing fund where you can monitor the past performance, in a NFO there is no past track record by which you can assess the fund’s performance. Hence ask yourself the following queries before you invest in a NFO: 

Does the fund house follow robust investment processes & systems?
Ideally, the fund house should have:

• Been in operation for a minimum of 5 years,
• A credible fund management team
• A sponsor with a reputable background

In addition, the fund house must follow robust investment processes, systems and adhere to a sound risk management framework. If these standards are not satisfied, it would be wise to give the NFO a miss.  

Also check whether:

• Schemes from the fund house have a good performance record
• Existing funds managed by the fund house and the fund manager have performed better than their category peers
• The investment philosophy of the fund and is it suited in the current market environment

If these factors have been met, then there is a higher possibility that the NFO will be managed prudently and may perform well. 

Is the investment proposition unique?

• Consider a NFO only if it offers a unique investment proposition that fits your risk profile, investment objectives, and can potentially add value.
• For this, study the fundamental attributes of the scheme - mainly the asset allocation, type of securities it will invest in, the investment strategy and objective, among others.

What is the investment objective of the mutual fund scheme?

• Read the Scheme Information Document (SID) which carries the investment objective, to know whether it matches your needs.
• E.g., if your objective is modest growth and capital preservation; then don’t invest in an equity oriented NFO.
• But remember that there is no guarantee that the stated investment objective will be achieved. 

What is the fund’s asset allocation and risk level? 

• Asset allocation determines whether the scheme will be classified as an equity-oriented, debt-oriented, hybrid, and so on.
• The range of assets the fund allocates among the various asset classes determines the risk level. Risk-o-meter which specifies the risk level for the scheme is also defined in the SID.
• Both asset allocation and risk level are stated in the SID. Ideally, consider an NFO that is best suited for your asset allocation (equity, debt, and gold) and risk profile. 

What is the funds’ investment strategy? 

• Investment strategy tells you where the fund will invest, how the underlying portfolio will be built, the investment style that would be followed, and so on. 
• It may help you ascertain whether and how the fund’s stated investment objective would be fulfilled, and if the investment proposition is indeed unique.  

How will the fund benchmark its performance? 

• The performance of any mutual fund scheme is tracked against a pre-decided benchmark index, depending on its stated investment objective.
• For instance, a Mid-cap Fund would be benchmarked against the S&P BSE Mid-cap or the Nifty 150 Index. Likewise, a Multi-cap Fund would be benchmarked against the Nifty 500 Multicap 50:25:25 Total Returns Index (TRI), and so on.  
• Knowing the benchmark index enables you to get a sense of how the fund would select the securities to invest, going ahead. 

Who will manage the fund? 

• The fund manager (and the fund management team) is responsible for the performance of the fund.
• Assess the educational qualifications of the fund manager, experience in fund management, the number of schemes he/she manages, and how those schemes have fared. 
• If the exiting funds being managed by the fund manager of the NFO have a good track record, then the odds are in favour of investing in the NFO. 

[Also Read: Types Of Mutual Funds]

How much is the expense ratio?

• To manage a fund, there are various costs involved–– brokerage on buying and selling securities, registrar and transfer fees, maintaining proper records of investors, custodian charges, legal and audit fees, management expenses, marketing expenses, etc.
• To manage these expenses, the fund levies a charge called the Total Expense Ratio.  
• The TER is calculated daily as a percentage of the scheme’s total assets. It is deducted from the fund’s NAV.
• For an equity fund, the maximum TER permitted as a percentage of net daily assets is 2.25%, whereas for a debt fund it is 2.00%.
• But a fund with a low expense ratio is not always better. If a fund with a unique investment strategy can generate a higher return, it may compensate you for the higher expense ratio. Therefore, do not pick a NFO solely based on its expense ratio, but also look at all the other factors discussed above.

Consider adding only those NFOs that are unique, hold the potential to add value to your mutual fund portfolio, and are in line with your risk profile, investment objectives, financial goals, and time in hand to achieve those envisioned goals. 

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply