Know All About Investing In NFOs | The Mutual Fund Show | NDTV Profit

  • 8 months ago
Should you invest in NFOs?

Full Circle Financial Planners’ Kalpesh Ashar discusses the ins and outs and key factors to consider, in a conversation with Tamanna Inamdar on ‘The Mutual Fund Show’.

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00:00 [MUSIC PLAYING]
00:03 Welcome.
00:09 You're watching the Mutual Fund Show on NDTV Profit.
00:12 I'm Tamannah Anandar.
00:14 And this is a show that aims to bring you
00:17 expert advice from the mutual fund industry
00:20 so you can make smart choices for your investments.
00:23 Now, today we're discussing NFOs.
00:26 That's new fund offers as an investment tool.
00:30 Here's a bit of context setting.
00:32 In a bull market, like we are in right now,
00:35 typically you have a slew of new fund offers.
00:39 AMCs, mutual fund companies, all of them
00:42 want to come out with more and more products for investors
00:46 to come into.
00:48 In fact, you've had record NFOs right from the year 2022,
00:52 2023.
00:54 There are at least 20-odd NFOs on offer just
00:57 for the month of February 2024.
01:00 The question that we're tackling today
01:03 is whether an NFO is actually a good investment option.
01:08 So an NFO typically comes at a face value of 10 rupees,
01:11 an NAV of 10 rupees.
01:13 You can equate it, in a sense, to an IPO,
01:17 except, of course, you don't have an immediate listing
01:21 price, et cetera.
01:22 It becomes attractive because of its NAV of usually fixed 10
01:27 rupees.
01:28 The question is that whether it's the right choice.
01:31 When should you go for an NFO?
01:33 And we're going to get you the pros and cons,
01:36 both sides of the story today when
01:38 it comes to new fund offers.
01:39 I'm speaking now first to Kalpesh Ashar.
01:42 He's CFP of Full Circle Financial Planners.
01:45 I will also be speaking with Alok Singh, who's
01:47 CIO of Bank of India Investment Managers.
01:50 They, in fact, have an NFO out.
01:52 And we'll ask him why he thinks NFOs are a good idea.
01:55 But first, for the other side of the story,
01:56 Kalpesh, great to have you on the show.
01:59 Thank you so much for joining us.
02:01 Let's first set a bit of context and put into perspective
02:05 why NFOs are seeing such great numbers right now.
02:10 Thanks, Kamal, for having me on this show on NETB Profit.
02:15 And always a pleasure doing a show with you.
02:18 The question about NFOs is that it's more of an emotional tag
02:24 or an emotional, I would say, attraction,
02:27 which investors have whenever there's
02:29 an NFO or stretching the yard a little bit
02:32 on the direct equity and IPO.
02:34 Because it comes out with a lot of fanfare and a lot
02:36 of attraction and a lot of publicity
02:39 given to the same thing.
02:40 But what we really need to see here
02:43 is that when do these NFOs actually
02:46 come into the limelight?
02:47 And as we've been seeing probably from, I think,
02:51 the last two, three years, would not be wrong to say,
02:53 that we are in a healthy bull run stage right now.
02:57 And this is exactly the period where
03:00 you will see a slew or a surge of NFOs being offered
03:05 by the mutual fund houses.
03:07 And it's pretty obvious.
03:08 The AMCs are into this business of expanding their own books
03:14 and offering more products, more varieties
03:17 to the investors, and also trying
03:20 to capitalize on what a particular team
03:22 or what a particular category has to offer.
03:26 And what better time than when the going is good?
03:29 And everybody is in a mood to invest.
03:32 And the economy looks good.
03:33 And the results are great.
03:35 So the mutual funds are pretty obviously
03:37 right in their place to launch new NFOs in a hurry.
03:42 And it becomes more of a heap of NFOs on the investor's
03:48 portfolio, if he or she were to subscribe
03:50 to a majority of them.
03:53 So the rationale has to be applied there.
03:55 And that is where a bit of common sense
03:57 by the investor himself, but more of a strict hand
04:01 by the advisor, needs to come in that what is right for you
04:05 or what is not right for you needs to be seen.
04:07 So it's more of a, I think, a phase of the markets
04:11 where NFOs come out.
04:12 And obviously, like what you also mentioned,
04:15 Tamanna, is that they come out with that--
04:18 I would say a low-high fixed-put-off,
04:20 any of your 10 rupees being offered,
04:22 which the investor feels that makes it a very cheap option.
04:26 And because it's the starting rate of the face value
04:28 of a mutual fund scheme.
04:30 So all these points put together,
04:33 it becomes an attractive proposition for the investor
04:37 to invest in it.
04:38 But again, the caveat remaining, does the investor
04:41 need it in his portfolio or not?
04:44 That is the million-dollar question.
04:46 And that is what we need to address, I think, on priority.
04:50 Yeah, so let me put it this way, Kapesh.
04:53 Apple to Apple, if it's a similar kind of fund,
04:57 whether it's a thematic fund, a sectoral fund,
05:00 a diversified fund, a multi-asset fund, a Flexicap
05:03 fund, would a previous fund or one with a longer track record
05:09 score above any NFO, just on the basis of the fact
05:13 that you actually have some kind of an idea of what
05:16 this fund's performance is like?
05:18 Absolutely.
05:18 You hit it on the head, Tamanna.
05:21 That's absolutely the criterion that a performing fund,
05:25 a fund which has been in existence for, say,
05:27 three, five, seven-year period, and has already
05:31 seen the various cycles of economy or the markets,
05:35 per se, I think is in a much more stronger standing,
05:40 much more better position to be, I think,
05:43 seen from a perspective from an investor.
05:46 Because it's weathered many storms.
05:48 Please understand that.
05:49 And it's also, if you say that in mutual funds,
05:52 what is the crux of mutual funds?
05:53 It offers diversification.
05:55 And that field also of diversification
05:58 has now been long explored by mutual funds.
06:01 So you used to have large caps earlier.
06:03 You used to have multi-caps.
06:04 You used to have lexicaps.
06:06 You used to have mid-caps and small caps.
06:08 So what's new?
06:09 The question is, what's new?
06:10 So by having a surge of NFOs calling themselves
06:15 a large cap or a mid-cap or something,
06:18 that's already there in the market.
06:19 It's up to an investor and his advisor
06:21 to sit together and find out what is right for him,
06:24 which is the right performing fund.
06:26 Does it match his goals?
06:27 Does the fund house adhere to the benchmarks, what
06:30 it has set for himself?
06:31 So those things put together, like a seasoned, experienced
06:35 fund would always, I think, have an edge over an NFO.
06:39 And rightly said, one more thing which you mentioned here
06:42 is that it's just the same thing which
06:46 is being offered time and again.
06:47 And for various reasons, which I spoke in an earlier segment
06:50 here, why are they keeping on offering it time and again?
06:55 One more thing which I would like to point out,
06:57 which I think is very important here, that post-2018,
07:00 SEBI came up with a lot of categories, which they opened
07:04 up, they subcategorized the mutual fund arena completely.
07:08 And that opened up spaces or slots
07:10 for many mutual fund houses to fix their schemes
07:13 if they didn't have a presence there.
07:15 So fair enough, it was done with a lot of rationale.
07:17 It helped a lot of, I think, dust to clear.
07:21 But then I think that has ended now.
07:24 There should be no, I think, fresh excitement for anybody
07:29 just hearing the word NFO.
07:30 There has to be a theme of inventiveness
07:34 or a theme which has not been explored
07:35 in the past, which compels the investor to invest in an NFO.
07:39 But the flip side of that, Kalpesh, is if I go by that,
07:43 then why should anyone invest in anything new?
07:46 Where is the case for investing in NFOs in that case?
07:50 Because you will be then restricted to just the funds
07:54 which have enough of a track record.
07:57 What does that mean for newer players that are coming
07:59 into the market, because there are quite a few of them?
08:01 They will obviously come with a new thinking, a new outlook.
08:05 Don't you think it'll become restrictive then
08:07 to only existing funds?
08:09 - Yes, I'll answer it in two ways.
08:11 So first let's talk about what is it
08:13 when you should invest in an NFO.
08:14 So for example, you talk about the Indian equity market
08:18 space where you talk about large caps, mid caps, small caps.
08:21 So it's the same ocean which everybody is trying
08:25 to pick up his best talk or pick up his best script
08:28 and pick up in a percentage or a rational,
08:31 which he or she thinks is the right,
08:32 that's the job of a fund manager.
08:34 Now, for example, if you're offering something
08:36 like a international fund category
08:39 or investing in something which is, say for example,
08:41 a NASDAQ team or in a European team,
08:44 which is something different,
08:46 which is not there in the Indian arena space
08:48 or you have the newer teams.
08:50 So you have the innovative, new age companies
08:52 which are not being explored.
08:53 Now that's something new and that sets your mind thinking
08:56 that, okay, should I take an exposure into that?
08:58 What is the rational behind it?
09:00 That sets your mind thinking.
09:02 And there should be always a question answer session
09:04 between the AMC and the investor or the advisor
09:08 to why should I invest in it?
09:10 What is so new in it which compels me to do it?
09:12 Second part of the question is that
09:15 what about the newer players?
09:16 So the mutual fund space has to get bigger.
09:19 It has to get more,
09:20 'cause I think this is the tip of the iceberg,
09:22 what we are seeing, the 18,000 per SIP book, which we have.
09:25 I think we have a lot more potential to do it.
09:28 Newer players are welcome.
09:30 We have a lot of unexplored space,
09:31 but let the newer players prove themselves.
09:34 My point is not for, I have no complaints.
09:37 Again, the AMCs are launching new fund offers.
09:40 They have their equal right to do it.
09:41 That's their business in which they are.
09:43 I'm talking about a buyer beware or a buyer caution
09:46 or a buyer awareness type of a thing
09:48 from the investor point of view
09:50 that let the fund house prove itself
09:53 in what different is it doing
09:55 and how is it adhering to the client interest
09:57 and also 100% performing to the required terms.
10:02 - We've been talking about NFOs on the show
10:05 and discussing whether NFOs are necessarily a good idea
10:09 as an investment option or not.
10:11 I'm joined now by Alok Singh.
10:13 He's the CIO of Bank of India Investment Managers.
10:16 And we want to get a different perspective
10:18 to the entire discussion.
10:20 Mr. Singh, welcome.
10:21 Thank you so much for speaking with us here at NDTV Profit.
10:25 Of course, the context is that you are launching
10:27 an NFO yourself.
10:28 It's in the process right now.
10:30 But let me start with the broad picture
10:32 because the question we've been asking
10:34 is without a track record like existing funds have,
10:39 are NFOs really the best bet for investors?
10:42 And what would you say to that?
10:44 - So if you look at, NFOs can be classified
10:50 into two categories.
10:52 One is basically there are existing funds
10:55 of that category may not be managed
10:58 by the same fund house or the same team.
11:01 And there basically there can be a value add
11:05 by the process they run, they look to manage it.
11:10 And it could be a fund which the concept
11:13 which already exists.
11:15 And there can be second category where the,
11:19 you know, it's a new category altogether
11:21 or a new concept altogether.
11:24 There of course, you know, there is no track record.
11:27 So in first case, obviously there's a track record
11:30 of that category.
11:32 What the fund house may offer is a new process
11:37 or the way to manage it.
11:38 But in the second category, yes,
11:40 where there are no similar funds
11:42 or the same concept does not exist anywhere.
11:46 There are somewhere, you know,
11:48 the leap of faith on depending on the concept
11:52 which we're talking about,
11:53 that is what the investor has to do.
11:57 But at the same time, everything starts somewhere.
12:00 So, you know, you can't say that only I will invest
12:03 when it is X years old and things like that.
12:06 - Yeah.
12:08 You know, having said that,
12:09 I want to understand from your perspective,
12:11 we've been speaking about this on the show
12:13 about a large number of NFOs hitting the market right now.
12:16 And of course that is a very clear characteristic
12:21 of a bull run.
12:22 Tell us about that perspective.
12:24 Why do AMCs, why do participants want to launch
12:28 a lot of NFOs right now?
12:30 You included.
12:31 - Yeah.
12:33 So obviously there is, you know,
12:36 you may have seen more NFOs
12:41 when the markets are doing good.
12:44 That is also because, you know,
12:47 you get to raise money when the people have money.
12:51 Typically, when the markets are not doing good,
12:55 even if that investment is not that good,
12:57 maybe people will not like to turn at that point in time,
13:00 or, you know, you're sitting on the mark to market losses.
13:03 When the markets are doing well,
13:05 people usually have more money.
13:08 Most of the money is in profit,
13:10 and they like to turn or look to evaluate new concepts
13:15 or re-divert, rebalance.
13:17 These are the reasons because of which, you know,
13:21 typically the new NFOs or even IPOs come
13:24 and people participate in that.
13:27 In our case, you know,
13:29 we are doing a multi-asset allocation fund.
13:34 While there are many multi-asset allocation funds
13:36 which are existing right now in the market,
13:40 but we are slightly different
13:43 because we are a debt-oriented multi-asset allocation.
13:47 Multi-asset as a concept,
13:49 we need to invest in three asset classes
13:52 up to minimum 10%.
13:55 So we are doing debt, equity, and gold,
13:58 where the debt is a larger portion.
14:02 And the reason we are doing it primarily
14:04 because for last three years,
14:05 the markets have been quite good.
14:07 People have made decent amount of money
14:09 and somewhere that the concept of risk
14:12 is less appreciated.
14:16 And we believe that, you know,
14:19 a debt-oriented funds also should be part
14:22 of the allocation strategy.
14:25 And that's why we are offering this at this juncture.
14:27 - Okay, fair enough.
14:28 And, you know, I want to thank you
14:31 for joining this discussion
14:32 because while we're not focusing solely on your fund,
14:35 we've talked about,
14:36 we're talking about a larger picture and a larger issue
14:38 and not specifically, you know, your fund.
14:41 I just want to make that very clear.
14:43 But I want to get Kalpesh's view
14:44 on some of the points that Mr. Alok Singh has made.
14:46 Mr. Singh, please do stay on with us
14:48 because we want to present both points of view
14:51 to our viewers.
14:52 On the point that you sometimes
14:56 have to take a leap of faith, Kalpesh,
14:58 but then there is a new idea
14:59 which is being presented as well.
15:01 That seems like a fair enough proposition.
15:04 - Yeah, fair enough.
15:06 So, you know, exactly the points
15:09 which Mr. Alok also mentioned
15:11 that in an NFO run,
15:12 the mindset of an investor is different
15:15 and that's why they would like to capitalize
15:17 on exactly the same point which I have mentioned.
15:19 But the crux point here is that, you know,
15:21 we are talking about just as a counter argument
15:24 and like what you rightly said,
15:25 it's not against a particular fund or a new NFO
15:28 that I would like to mention here.
15:31 But the thing is that, you know,
15:31 we have a multi-asset fund or a large cap fund
15:36 or a flexi-cap fund,
15:38 which is offered by all agencies
15:41 at some point or the other.
15:42 And to each his own, you know,
15:45 the concept, the taxation part
15:47 and everything is more or less the same.
15:49 The point is that the investor has to decide
15:53 that I do not, we have seen instances
15:56 because I face clients directly
15:58 where he might be having three or four
15:59 multi-asset funds in his portfolio.
16:02 Now that is surely detrimental to his portfolio returns.
16:06 You can't have four large cap funds.
16:09 You can't have three small cap funds in a portfolio.
16:13 And all of that is probably the,
16:15 you know, if you see it in detail,
16:16 when was this purchased?
16:18 All of them would probably be, you know,
16:21 from the inception, that is from the NFO stage.
16:23 And from a simple argument that it has been
16:26 either hard pushed to him
16:28 or he's been attracted towards it
16:30 or he's probably been misguided
16:32 or, you know, we don't know the reason.
16:34 But this is a major cause of concern for his portfolio.
16:38 And that is when, you know,
16:39 we financial advisors or planners
16:41 who look at the portfolio returns on an overall,
16:44 it's an overlap.
16:45 It is not meant for, you know,
16:46 reaching his financial goals.
16:48 And it becomes more of a burden rather than,
16:51 you know, an advantage in his portfolio.
16:53 So this type of, I would say,
16:56 a mixture or an assortment of funds in a portfolio,
16:59 I think that is detrimental.
17:00 And again, I would like to, you know, repeat here
17:02 that with, you know, due respect to the AMCs,
17:05 it's only investor or the client who decide
17:08 that which, you know, particular category
17:10 or which particular fund of AMC
17:13 he wants to patronize or select in his portfolio.
17:15 And then he does the due diligence and then invest.
17:18 Because then beyond that, he cannot stretch it.
17:21 - Okay, so you're saying it's not necessary
17:23 that a lot of funds in your portfolio is a good idea.
17:26 Mr. Alok Singh, I want to get your perspective on,
17:29 you know, the question which was raised with NFOs
17:31 that they have a larger cost attached to them
17:35 because they're newer funds.
17:37 So it turns out to be a little more expensive
17:40 for the investor.
17:41 There is probably not obviously a track record.
17:46 And if you go out looking in a market now,
17:48 which has a fair amount of depth like ours,
17:51 you will always find another alternative
17:53 with a longer track record.
17:55 Would you say this is fair or being a little harsh on NFOs?
17:58 - Yeah, so you are right on the part that, you know,
18:03 where the expense ratios structure exists right now.
18:08 For a smaller fund, it can be slightly more
18:12 than a larger fund.
18:14 But frankly speaking, in a larger scale,
18:17 that's a very small or, you know, microscopic view.
18:22 Because yes, you know, while the other panelists
18:25 have raised the point that there can be five large cap funds
18:29 and five expense in a portfolio,
18:31 but that is all what we are talking about is allocation.
18:34 The selection also plays an important role.
18:37 While there may be 30 large cap funds in the market
18:41 and there can be as a market in each category,
18:45 but does every fund perform as well?
18:47 No, even if there is a long-term difference
18:50 of say two, 3%, which can be,
18:53 if you look at on a compounding basis,
18:56 even 1% extra compounding for next 10 years
18:59 will make a lot of difference.
19:00 While somebody may say that, okay,
19:02 oh, this one particular fund is giving 18
19:05 and another is giving 19,
19:06 but on the compounding side, it makes a lot of difference.
19:08 So while I agree on the point that only
19:11 when we talk of the asset allocation,
19:13 then obviously we need, cannot have same fund type
19:18 or as a large portion of our portfolio, we need to choose,
19:21 but then the investor also needs to do the selection right.
19:25 We always talk of allocation.
19:27 We talk of, okay, invest X percentage in large cap,
19:30 X percentage in mid cap,
19:32 it's more X percentage in XYZ category,
19:35 but we rarely talk of selection
19:37 because selection makes a lot of difference as well.
19:40 Because we have seen over the period of time,
19:42 if you look at three or five or 10 years,
19:44 that records of even the existing funds,
19:47 they may have underperformed the best in class
19:50 and the person may be invested in not so.
19:52 So that is important thing which needs to be appreciated.
19:55 And that is why the people need to look at it holistically,
20:00 not just by the, okay, existence.
20:03 Existence does not lead to performance.
20:06 So we need to also look at ultimately
20:09 whosoever has given money or invested money
20:12 which for the wealth creation
20:13 and the wealth creation happens
20:15 not by virtue of just allocation.
20:17 Selection also plays an important role.
20:19 - Fair point, fair point.
20:20 So a very interesting debate here.
20:21 It's not a one size fits all.
20:23 In some cases, an NFO might be a good choice.
20:28 And of course, allocation also becomes key,
20:31 but don't choose something just because it's new.
20:34 On the other hand, don't ignore an option
20:39 just because it's new.
20:40 You will have to go into those details.
20:43 And that is really the point that we wanted to bring across.
20:46 Thank you so much, Mr. Alok Singh.
20:47 Thank you so much Kalpesh for joining us on the show today.
20:50 We hope this has been useful to our viewers
20:52 when deciding where to allocate their money.
20:55 Of course, if you want to reach out to us
20:56 for specific queries on your portfolio,
20:58 all of those numbers on your screen.
21:00 Until next time, thank you for watching.
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