How to pick NFOs?
Lately, we are seeing a lot of new fund offers (NFO) floating in the market. This can be largely attributed to the confidence that the equities have gained since the pandemic-induced panic in March 2020. This surge in the market has also helped the equity-dedicated funds to perform well. And definitely, it makes much more sense to launch funds when the investment sentiments are supportive. For those who are new to mutual funds, NFO is nothing but the initial subscription offers for a newly launched mutual fund scheme by an asset management company (AMC).
Having said, it is quite easy to pick a fund, which is already there in the market for quite some time as we have its historical net asset value (NAV) data as well as the current portfolio. However, if no such information is available, it gets quite difficult to pick an NFO. In this article, we would understand how to pick NFOs.
Investment theme & strategy
Understanding the investment theme of the fund is the best way to begin your NFO picking journey. Every NFO has its unique scheme information document (SID) wherein, it states the objective of the scheme and how it aims to achieve it.
And in the SID, itself, you will find the answer as to how it aims to achieve its scheme objective. For this, you need to look at the asset allocation plans of the scheme. Here, it will clearly state whether it will be skewed more towards equity or predominantly investing in debt and money market instruments or will it follow a hybrid approach.
Not just that, but essentially what it’s going to offer which no one is currently offering, is equally important. Say, for instance, environment, social & governance (ESG) theme. When the ESG theme first came, it was a new concept that can be considered investing in then. But the same might not hold true for a fund house launching a large-cap fund as you'll have quite a lot of funds having a performance history in that category.
AMCs' track record
The AMCs' track record and its market reputation are other important factors to consider while investing in NFO. In order to understand this, you can check its existence like how many assets it manages? How many mutual fund schemes it currently offers? And how is the performance of offered schemes?
It is relatively safe to opt for the NFOs of the established AMCs than the newly established ones. Though, this in no way means that the newly established ones are not credible. However, it should not be the sole basis for selecting a particular NFO. In fact, there are such newly established AMCs in India that offer relatively fewer schemes but are high-performing ones.
Fund managers' track record
Knowing the track record of AMC is not enough. It is equally important to know the track record of the fund managers. This is because ultimately, the fund manager is the person who will be managing your money invested in the scheme. He is the captain of your mutual fund scheme.
In order to understand the track record of the fund manager, you can check the performance of the schemes currently managed by him, his educational qualifications, his work experience in the mutual fund industry, etc.