NFOs of 2023: Is it wise to invest in them? Lessons to take with us into 2024
The Indian stock market's bull run in 2023 boosted investor confidence, leading them to explore alternative investment avenues like NFOs.
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Business News/ Money / Personal Finance/ NFOs of 2023: Is it wise to invest in them? Lessons to take with us into 2024
The year 2023 has proven to be exceptional for NFOs. Fuelled by a generally optimistic market sentiment, mutual funds seized the opportunity to launch a variety of schemes designed to cater to a broad spectrum of investor preferences.
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Before the conclusion of this year, around 228 NFOs, spanning active and passive schemes in both equity and debt categories, including open-ended and close-ended schemes, have attracted investments exceeding ₹50,000 crores. This suggests a significant influx of both new and existing investors seeking to capitalize on the current market upswing.
In 2023, the Indian stock market experienced a notable bull run, with major indices such as Sensex and Nifty recording gains exceeding nearly 20 per cent. This upswing in the market significantly bolstered investor confidence and increased their willingness to take on risk, leading them to explore alternative investment avenues such as NFOs.
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Greed versus optimism
Yet, could this market fervour be indicative of investor greed rather than optimism? The attraction of rapid profits has enticed multitudes to invest in NFOs lacking established track records. The peculiarity in investor behaviour becomes more pronounced as individuals overlook asset management companies (AMCs) boasting a phenomenal long-term track record of delivering substantial returns over the past decade or more.The temptation of fast profits has historically led to more harm than benefit. This is exemplified by an anecdote frequently recounted by Howard Marks, Co-founder of Oaktree Capital, to illustrate the perils of risk in investing. Marks shared, “I tell my father’s story of the gambler who one day hears about a race with only one horse in it, so he bet the rent money. Halfway around the track the horse jumped over the fence and ran away."
Even though seasoned market veterans and financial advisors consistently caution investors against unwarranted risks, the allure of making a quick profit often leads investors to act in defiance of such advice.
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Lessons learnt
Marks’s widely read anecdote imparts a crucial lesson. The accomplished investor emphasizes the significance of acknowledging the potential for abrupt and unforeseen developments in the realm of investments. In the given example, the gambler had likely not contemplated the possibility that the horse he wagered on could break free from the track. This narrative underscores the essential nature of understanding and managing investment risks.Carl Richards, a certified financial planner, and creator of the Sketch Guy column in The New York Times once famously said, “Risk is what’s left over after you think you’ve thought of everything."
Investors may encounter unforeseen events beyond their anticipation, and it’s not necessarily their fault. Entire investments can vanish into a sinkhole, resulting in substantial losses—an unconventional but valuable lesson for investors.
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In the realm of investing, categorizing actions as inherently good or bad is elusive. It ultimately hinges on one’s definition of risk, readiness to absorb market volatility, comprehension of returns, and patience in securing profits. Beware of brokers promoting deceptive notions like “Invest today and redeem tomorrow," as these statements can be highly misleading. As the famous adage goes, “Only two people know the top and bottom of the market: God and a liar".
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