The only situation where looking at an NFO would make sense would be if the new fund offers an interesting new theme that is not available in the space of existing funds
Recently there have been quite a few New fund offerings (NFOs). I have already invested Rs20,000 in mutual funds through systematic investment plans (SIPs) of Rs20,000, divided equally in four funds. On what basis should I decide if an NFO suits me or not? I am a long-term investor with no immediate goals.
—Ravi Kumar Kaushal
NFOs are brand new fund launches by fund houses offering units to investors who are attracted by the theme or idea. Some of these new funds are open-ended funds—meaning they are regular funds that one can invest in any time and redeem any time. However, recently there have been many more closed-end NFOs—funds that offer subscription only during the NFO period and money can be redeemed only after a specified investment period, typically 3 years or more. Such funds allow a fund manager to operate freely without yielding to market volatility or redemption pressures. But from an investor’s perspective, the money is completely locked-in for the fund’s tenure.
As an investor, the ultimate aim is to generate good returns, commensurate with the risks taken from an investment portfolio. It does not matter whether these returns come from old funds or new funds. So, given the fact that there are several well-proven open-ended funds in the market, it would be a rare situation where an investor would need to consider an NFO that has no track record as a must-have investment option. From the perspective of a regular SIP investor, the only situation where looking at an NFO would make sense would be if the new fund offers an interesting new theme that is not available in the space of existing funds. The current housing opportunities fund from HDFC Mutual Fund can be cited as an example of such a fund. If some investors feel optimistic about a theme offered by such a fund, and if it complements their existing portfolio well, then they can take a measured exposure of 5-10% of their investments in such a fund. If these conditions are not met, it would be better to pass on NFOs and stay put in established funds.
In 2023, we are planning to send our son abroad for higher education. The estimated cost would be Rs50 lakh. I can invest up to Rs50,000 via SIPs. I also have Rs4 lakh that I can invest as lump sum. Please suggest a few good schemes.
Before we get to investment options, let’s do a little bit of maths. You have 5 more years to build the corpus needed and you are seeking to build Rs50 lakh through a combination of lump sum and SIP investments. This period is not very long and accordingly you need to be a bit cautious with your investment choices. I would assume that you can generate relatively moderate compounded returns of 10% annually through these years. If that is the case, then the Rs50,000 a month SIP would generate close to Rs40 lakh in this time-frame, and your Rs4 lakh could generate another Rs7 lakh. You would get pretty close to your goal, and if you are lucky with the returns, then you could reach the goal amount you are seeking.
When it comes to portfolio, I would recommend that you take a slightly cautious approach with investments. You can divide the amounts (both lump sum and SIP) into five equal parts and invest in a large-cap fund, two balanced funds, a mid-cap fund, and a short-term debt fund. This would give you a 65:35 asset allocation between equities and debt, which would be commensurate with your time frame. Franklin India Bluechip, HDFC Balanced, ICICI Prudential Balanced, Mirae Asset Emerging Bluechip, and UTI Short Term Income funds would make a good combination for this purpose.
Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com.