With a surge in mutual fund launches, there are currently around 14 New Fund Offers (NFOs) open for investment. As investors look to capitalise on these opportunities, it’s crucial to approach NFOs with a discerning eye.
Shaily Gang, Head of Products at Tata Asset Management, outlines five essential factors to consider before committing your hard-earned money to an NFO.
Assess the unique value proposition
Investors should first evaluate the differential advantage offered by the NFO.
Gang emphasises, “There might be an existing category, but the NFO could introduce a unique portfolio construct.”
For instance, an active fund NFO that focuses on high-risk, high-reward stocks could be attractive to those with a higher risk appetite.
Conversely, an NFO that emphasises earnings stability in equity funds or maintains a non-AAA allocation in debt funds may cater to more conservative investors.
Identify demand drivers
It’s important to consider the underlying themes or sectors that the NFO targets.
“Certain sectors, like auto, infrastructure, or renewable energy, are expected to outperform the broader market due to strong demand drivers,” says Gang.
These themes often align with government initiatives and economic trends, making them potentially lucrative investment opportunities.
An NFO that captures these trends through active or passive strategies may be worth exploring.
Look for first-of-its-kind constructs
Investors should be on the lookout for NFOs that create new index constructs.
Gang explains, “A first-of-its-kind index capturing specific market segments can be a compelling investment.”
For example, an NFO that applies momentum factors to a new universe or sector may provide unique exposure not previously available.
Such innovative constructs can offer an advantage in a competitive market.
Consider complex strategies
Some NFOs incorporate strategies or asset classes that are difficult for individual investors to manage on their own.
“Investing in commodities or executing complex arbitrage trades can be challenging for the average investor,” Gang points out.
Multi-asset funds that include commodities or replicate momentum indices can simplify the investment process and make sophisticated strategies accessible through an NFO.
Evaluate the expense ratio
Finally, Gang stresses the importance of a reasonable expense ratio.
“Always compare expense ratios within the fund category,” she advises.
A lower expense ratio can significantly impact net returns over time, making it a critical factor when choosing an NFO.