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Investors would be better off avoiding NFOs

Evaluating NFOs becomes difficult, if not impossible as they have no track record

On what parameters can I evaluate new fund offers (NFOs)?

—Chandra Prakash

NFOs are brand new entrants into the investment market. When determining if a scheme is good or not, regardless of whether it is an NFO or something else, we are trying to determine whether the scheme will deliver returns that are competitive in its category of funds and commensurate with the risk it takes (or would be taking, in case of NFOs). While evaluating in this manner, we also determine if the scheme is suitable for our needs and how it will fit into our portfolio: whether it will add diversification and balance, or will it replace an existing scheme?

These evaluations become difficult, if not impossible, when with NFOs because they have no track record, given that they are yet to commence operations. Apart from what the prospectus says, we don’t know what the investment style of the scheme would be and whether the strategy of its fund manager would work successfully in the market.

Also, very often, it is likely that there are already several schemes in the market that have an investment profile or mandate similar to the NFO, and these existing funds would have a track record that would allow us to evaluate them objectively. Thus, the likelihood that a new fund would perform better than the star funds in the market is a low-probability bet.

NFOs should be considered only if there is a new type of fund that fills a gap in an investor’s portfolio, or provides a new dimension of diversification. For example: if a new fund is investing in a country or area where there are no good funds, and if such a fund would fit into an investor’s portfolio. Apart from such unlikely scenarios, investors would be better off keeping away from NFOs and staying with tried and trusted funds.

I had invested in mutual funds long ago. I want to redeem them now. However, I have closed the account that was linked to the fund. How do I get my money now?

—Lalit Narayan

Even if you have closed the bank account attached to an active mutual fund investment folio, your money is safe and can be redeemed. Broadly speaking, you would need to go through a two-step process to get your money. One, change the linked bank account (to an active account). Two, submit the redemption request to receive the money in the active account.

The first step can be accomplished by submitting a change of bank request form to the mutual fund company, which is commonly called an asset management company (AMC). For this, you will need to provide proof of owning the new bank account (with a cancelled cheque or bank statement). Many AMCs will also require you to provide proof of owning the old (inactive) bank account. If you happen to have a cheque leaf or an account statement for the old account, you can produce that and all will be well. If not, you can approach the bank and try to get a banker’s letter vouching for the fact that you had that particular bank account. After you change the bank account attached to the folio, simply submit a redemption request and the money will be credited to your new bank account.

I have invested Rs5,000 each in Birla Sun Life Frontline Equity, Birla Sun Life Balanced ‘95, HDFC Top 200, SBI Bluechip and Franklin India High Growth Opportunities via SIPs. I am planning to invest Rs25,000 more with my wife’s monthly savings. Should I increase the systematic investment plan (SIP) amount in existing schemes or should I invest in new ones? Also, is it wiser to invest in my portfolio or should she create a portfolio of her own since we both have the same goals?

—Kishan Sharma

Your current portfolio is aggressive, which shows in the mostly equity-based fund selection. There is just a sliver of debt, from the debt component in the balanced fund. This is fine as long as your goal is long term—as in beyond 10 years. Your fund selection is generally fine. There are two diversified funds, one blue-chip fund, a balanced fund and a mid-cap fund. Some of the funds—the HDFC fund in diversified category and the Franklin fund—can be quite volatile but they are fundamentally well-managed funds that have a very good track record. So, you can continue investing in this portfolio.

You may want to create a different portfolio for your wife, though with similar funds as your own. For example, you could go with HDFC Balanced for the balanced fund with funds such as Franklin India Blue-chip, HDFC Equity, Kotak Select Focus, and Mirae Asset Emerging Blue chip fund. This way you have diversification in terms of fund houses and management styles, while keeping your portfolio design similar.

Srikanth Meenakshi is co-founder and COO,

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