Investing in NFO? Read this first

The swings in the stock markets have been nothing short of gut-wrenching in the last month. The ups and downs have made the investors rather dizzy.

But while the market has been volatile, a whole lot of asset management companies have been entering the market with their new fund offerings.

NFOs, unlike initial public offerings of companies, have a major advantage. If the market crashes, it is not really bad - the fund manager will be able to invest the mopped-up amount at lower valuations. Also, the stock market gyrations do not seem to have any major effect on NFOs.

But fundamentally, is it a good idea to subscribe to NFOs? The answer could be both yes or no. Many fund houses come up with NFOs to complete their bouquet of offerings.

They also keep coming up with NFOs, as they are easier to sell. There is this erroneous perception among the investors that if you get a unit at Rs 10, you are getting it at a bargain. Hence, they are better received.

The problem arises when the AMCs come up with another mock up of an existing fund in their portfolio to mop up additional funds from the investors. Here, before investing, you need to answer whether the existing fund is better than the new offering.

As far as the existing fund goes, there is the advantage knowing the investment style, portfolio, performance at different stages in the market.

Though the Sebi guideline clearly asks the mutual funds to mention that past performance is no indicator of future, for an investor, it gives some indication about the way the fund has been doing.

Therefore, if there is a choice between an existing fund and NFO, where the parameters are the same, it is better if you were to opt for the existing fund.

Also, a newly-launched fund incurs a lot of marketing expenses, which will be recovered from you whereas for an existing fund, the marketing costs are much lower.

In other words, in case of same theme funds with the same AMC, you should go for an existing fund, rather than new funds.

Of course, when there are unique theme funds, which add value to your portfolio, you should look at going for them. For instance, there are funds that are now offering diversification through investment in international markets.

Then, there are gold funds and gold mining funds which are unique in nature. Similarly, there are others that combine fixed maturity plans like qualities and equity, thereby making them unique.

In other words, if the fund is not just any other gimmick and offer more variety, it is definitely on. But remember that building a portfolio, which depends primarily on subscribing to NFOs, is not a strategy.

The other strategy that investors are fond of is to accumulate the top funds, as reported from time to time. It just shows lack of understanding and application. Ad hoc investment is what causes problems, as it has not been put together based on the person's needs.

While investing, it is important to identify your needs, select your funds accordingly and then invest in them.