NFO mania is back: 3 questions you should ask before investing

Around Rs 29,000 crore has been raised via 41 equity NFOs in just about half of this year. Going crazy with the madness of the bull markets, people usually invest their hard earned money in such scenarios without much thought. However, new funds in general disappoint investors with their performance when compared with existing funds. So to maintain your objectivity and avoid getting swayed by an NFO sales pitch, here is a guide to help you navigate the clutter of new funds. Just ask yourself these three questions in the order presented below and you should be able to decide whether or not a new fund offer (NFO) has any investment case.

Is there anything new about the new fund?
Many times, it is seen that AMCs keep throwing new funds in the market that are more or less similar to the existing ones. Therefore, before jumping to buy an NFO, ask yourself - what dimension can this fund add to my existing portfolio? While answering this question, your rationale should dig deeper than merely a thematic twist. For instance, is the new fund adding a new asset class to my portfolio?

When international equity funds or gold funds hit the market for the first time, they genuinely offered some diversification. Despite being new to the Indian investors, some of these schemes have a visibility around their historical performance if the underlying portfolio is a well-in-place index or an existing offshore fund whose track record can be evaluated. Further, while examining any new theme-based fund, check what would prevent the fund manager or the fund house to include a promising stock of that theme in other plain vanilla funds as well. In the case of ESG funds, a huge overlap has been observed between ESG fund portfolios and other diversified equity funds of the same AMC.

Finally, remember that it is a bad idea to put lump-sum money in equity, especially at high market levels. And NFOs ask you to do just that. Always invest in equity through SIPs.

Does the new fund fulfill my investment need?
Something new does not necessarily mean something useful. If you have already built a portfolio that sufficiently covers your investment needs, the new fund is simply avoidable. Think of the mutual fund space as a supermarket. You don't need most of the products but marketing gimmicks, combined with other practices, constantly bring them to your attention just so that you give in.

So, reflect on the use case of the new fund for yourself. For instance, index-based target-maturity funds can be suitable if you want to invest for a fixed tenure that matches with that of the fund.

Are there existing funds following the same investment strategy?
This question would kill almost every new fund idea in a space where sufficient funds already exist. So, even if the answer to above questions is in affirmative, look around if there are existing funds with a good track record which can give you similar investing flavour. If yes, you have a compelling case to go with them rather than taking chance with a new one.

On the contrary, if old funds with similar strategy have failed to deliver well in the past, you don't need that strategy. This effectively leaves you with the funds which principally have something new to bring to the table. But don't forget that these new styles may have never been tested before and no matter how promising they are made to look like, it is still unknown whether that investment strategy is going to earn you good returns in the future. Also, some of them might be too niche to fit into your risk appetite.

Don't buy a fund just because of the fear of missing out. Remember that unless it is a closed-end scheme, you can always invest in that fund later. Many funds are not even worth buying. So, choose wisely.

Also in this series:

NFO mania is back: Old vs new funds

NFO mania is back: Why new funds lag behind

NFO mania is back: New triggers for new funds