How to evaluate a new fund offer2 min read . Updated: 15 Nov 2012, 07:43 PM IST
Check if the NFO offers a new theme or something that existing schemes don't offer
Not all new fund offers (NFO) merit investment. Most are clones of existing schemes, but there are some that stand out. Here are some common guidelines on how to evaluate NFOs.
A novel theme
Check if the NFO offers a new theme or something that existing schemes don’t offer. For instance, when ICICI Prudential US Bluechip Equity Fund got launched in July 2012, it offered a chance to invest in US equity markets, in some of their large and well-managed companies. Not only was the scheme unique, it also tied up with Morningstar, one of the world’s largest investment research firms, to zero in on the stocks. Although the scheme wasn’t fit for a first-time investor, it appealed to those who are thoroughly invested in Indian equity markets and would do with some foreign diversification.
Good fund manager track record
Sometimes, soon after a new fund manager (who comes with, say, a good track record) joins a fund house, it launches an NFO to leverage on the fund manager’s name and track record. Though, we would generally advise caution in such cases, sometimes such NFOs offer a promising future.
However, many fund houses get their new fund manager to try and resurrect their old schemes (if they haven’t been doing well) and think of launching NFOs only after the new fund manager settles in and grasps the existing schemes. For instance, when the fund management of Canara Robeco Asset Management Co. Ltd changed in 2008 and fund managers Anand Shah and Ritesh Jain came on board, the fund house launched few new schemes to capitalize on the prowess of the new fund team. The fund house itself restructured in 2007 after Robeco, a Netherlands-based AMC, acquired 49% stake in Canbank AMC (now Canara Robeco AMC).
A new feature
This one’s a rarity these days, but a few years back, there were occasional NFO with a unique feature. For instance, in 2005, Sahara Asset Management Co. Ltd launched an equity scheme with variable pricing mechanism. Called Sahara Wealth Plus Fund, it aimed to charge AMC fees (the portion of total expense ratio that goes directly to AMC as fees for managing your money) based on its performance. As per its website, it takes into account its benchmark index’s (S&P CNX 500) returns. Depending on the returns, the AMC fees will be either nil, half of “maximum permissible AMC fees" or “maximum permissible AMC fees". As per Value Research, the “variable pricing" option has marginally outperformed the “fixed pricing" option over the past three and seven years.
What should you do?
The above points are broad guidelines that nudge you to take a closer look at NFOs. However, not all NFOs, despite one or more of these features, merit investment. Keep reading Mint Money for detailed NFO analysis as and when they get launched.