Ask in any personal finance forum, “Can I invest in XYZ NFO?” there would be an immediate refrain, “Never buy NFOs!”. Context is often the first casualty in such a forum, and this response is no different.
All mutual funds carry a past performance disclaimer – past returns do not indicate future returns. Then why can’t I invest in a mutual fund NFO?
Everything we know about a mutual fund is based on past performance. From a simple NAV to returns, to one of these Greek risk-adjusted measures, alpha, beta, etc., to the style of a fund manager, the nature of the portfolio, PE, PB, everything is a data point in the past.
No matter how great the track record of a fund, no matter how consistent, mutual fund investing (like other personal finance purchases) is a leap of faith. So why can’t one take that leap with an NFO?
We are always learning new things about the market and market risk.
- Active funds find it tough to beat the index. Myth Busted: Active mid cap mutual fund managers can easily beat the index
- The Nifty Mid cap 150, which had always matched the performance of the Nifty Next 50, has pulled ahead for the first time in the last couple of years. Nifty Next 50 has been underwater compared to Nifty 50 for the longest time recently. See Nifty vs Nifty Next 50 vs Nifty Midcap 150 vs Nifty Smallcap 250.
- Nifty Midcap 150 Quality 50, which had such a stellar backtested record, has struggled recently. See NSE Index Watch: Biggest winners and losers of 2022
- A few years ago, no one could have imagined an equal-weight index (Nifty 100 EW or Nifty 50 EW) to deviate so much from their parents, Nifty/Nifty 100, because just a few stocks were responsible for the movement of the Sensex/Nifty. See Return difference of the Nifty 50 vs Nifty 50 Equal-weight index at an all-time high!
- We constantly see examples of past performance not meaning anything: Ten-year Nifty SIP returns have reduced by almost 50%, and Franklin India Bluechip Fund has not beaten the Nifty for the last 11 years! And Misconceptions about the Nifty PE
- The definition of a “high PE” has constantly changed, and the Sensex was not overvalued when it crashed in 2008 (by its own PE track record). Even the technical definition of a PE has changed, rendering all past history questionable, if not meaningless.
- We have seen past star performers in the MF spaces relegated to average or below-average slots (e.g. DSP 100, HDFC 100, HDFC Equity, HDFC Taxsaver, etc).
- A look at the rolling returns graph of any index or mutual fund would tell you expecting returns from mutual funds is a mistake.
Since past performance is of little relevance to the future, since buying mutual funds boils down to potluck, there is no harm in buying mutual fund NFOs.
However (there is always a however!), an NFO purchase makes sense only if it holds a unique place in your portfolio, only if you can measure the impact of that fund on your portfolio, and only if you can clinically evaluate if there is something unique/good about the fund.
If you already hold ten funds, then just about any NFO would buy more of the same stocks you hold. In this case, an NFO purchase does not make sense.
It is a mistake if you get enticed by a bank RM’s exaggerated statements about an NFO. It is a mistake if you think purchasing NFOs will get cheaper units (at Rs. 10) and, therefore, more returns.
NFOs should be avoided because most people do not need them. Most of these have nothing better/unique/different from what is already available (often at lower expenses), and investors would already have them.
However, there is no logic to the advice, “avoid NFOs because they have no track record; prefer a fund with a good track record”. No logic because it would mean we are ignoring the past performance disclaimer!
Few investors would have the logical space in their portfolios to accommodate an NFO. But would they have the necessary guts? Experienced investors must summon enough courage to discard past performance and expect market movements with an open but prepared mind. We can sleep better when we remove expectations from factors we cannot control.
Note: Readers may be aware that I purchased two NFOs – Parag Parikh Flexicap (because I had the space in the portfolio), UTI Low Volatility Index Fund (as a replacement for Quantum Long Term Equity and, well, I like low volatility!) and a new fund – Parag Parikh Conservative Hybrid Fund (because I needed a debt fund in the portfolio). So far, so good – just luck. That’s it.
Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Podcast: Let’s Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it’s content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)
