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Friday, February 13, 2009

Investment in NFO isn't always dumb

A huge amount of financial advice is available these days. The good thing is that such advice serves to guide investors and remove false perceptions.


However, there is also the danger of investors applying a suggestion given in particular context to all situations.


One such area is the ` new fund offers' (NFO) of mutual funds. The general advice, mostly accurate, is that an existing fund with a track record is safer option than a new fund. Moreover, it is factually correct that the offer value of Rs 10 per unit in no way makes the new fund superior to an existing fund with Rs 150 as its NAV.


However, there is danger of stretching the case against NFOs too far. It is indeed quite possible that the new offering incorporates some new characteristic that makes it different from an existing fund. It is for the investor to question advisors about the special investment need the new fund offering is trying to address.


If the new feature of NFO matters to you, it may be worth considering the offering.


Even in the case of a new fund not substantially different from an existing one, the decision (not to invest) is not a foregone conclusion. Many times, the premier leading scheme of a fund house can become too large; there is a fear that large funds slow down in terms of returns. This is particularly true of mid-cap funds where finding enough stock at minimum impact is an issue.


This, is ofcourse, is circumscribed by the return expectations. One critical factor in return expectations is the capability of the fund manager. The argument is that a good track record of an existing fund should carry more weight as compared to a new fund with no track record. This argument too is true in a context where the NFO is from a new fund house and if the competing existing fund has proven itself well. But this argument may not apply as forcefully where a fund house with good schemes comes out with new offerings. In such a case, the fund management capability of the house is already proven.


So, do consider the context in which advice is given.

source: The Economic Times

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