The Indian mutual fund industry has witnessed a surge in new fund offers (NFOs) in the first quarter (Q1) of 2024. According to AMFI data, in 2024 until now a staggering 63 new fund offers were launched by various fund houses, catering to diverse investor appetites. This influx of options could be exciting for investors seeking to grow their wealth, but it also necessitates careful evaluation before committing their hard-earned money.

The Indian mutual fund industry is experiencing a dynamic phase in 2024. Assets Under Management (AUM) has witnessed a significant increase, marking the 12th consecutive year of growth. The AUM of the Indian mutual fund industry increased more than six times in ten years, from Rs 8.25 trillion on March 31, 2014, to Rs 53.40 trillion on March 31, 2024, based on AMFI data. The total number of accounts (or folios as per mutual fund parlance) stood at 17.79 crore (177.9 million) as on March 31, 2024.

[Read: India’s Mutual Fund Growth Story: 2023 Trajectory and Future Outlook]

The industry is increasingly targeting retail investors. This is evident from the growth in retail investor AUM outpacing that of institutional investors. With a growing tech-savvy investor base, online platforms and mobile apps are gaining traction for investment transactions and information access.

Recently, Tata Mutual Fund launched six new index funds at once in April 2024, focusing on sectors like Auto, Healthcare, Realty, Financial Services, Manufacturing and Infrastructure. In addition, other fund houses like Bandhan Mutual Fund, TRUST Mutual Fund, PGIM Mutual Fund, Navi and Helios Mutual Fund, etc. also introduced various new fund offers under different categories of Mutual Funds.

[Read: Looking to Invest in Growing Sectors? Tata Mutual Fund Launches 6 New Index Funds (NFOs)]

Graph: Rise in Launch of NFOs in the Past One Year (FY 2023-24)

Data as of April 22, 2024
(Source: AMFI, data collated by PersonalFN Research) 

This article delves into the recent NFO trend, explores the factors driving it, and equips you with a framework for analysing these new offerings. We’ll also explore some key considerations to keep in mind before investing in an NFO.

Why the Rise in NFOs?

Several factors contribute to the current NFO boom. Fund houses aim to capitalise on emerging market trends and investor preferences. For instance, the recent focus on environmental, social, and governance (ESG) investing has led to the launch of ESG-focused NFOs. Similarly, with an ageing population, there might be a rise in NFOs catering to retirement planning needs.

A diverse product portfolio allows fund houses to cater to a wider range of investor profiles with varying risk appetites and financial goals. NFOs may fill gaps in existing offerings or provide unique investment propositions.

New fund offers may generate excitement and attract new investors to the mutual fund industry. Clever marketing campaigns and innovative investment strategies could pique investor interest and lead to increased AUM (Assets Under Management) for the fund house.

However, it’s important to remember that NFOs aren’t always launched with the sole purpose of benefiting investors. Some factors to consider when evaluating the motivations behind an NFO include:

  • Market Saturation:  Sometimes, NFOs might be launched simply to compete with existing offerings in a particular category. Investors should scrutinise whether the NFO offers a truly differentiated strategy or simply replicates existing options.
  • Performance Chasing:  Past performance isn’t always indicative of future results. Fund houses might launch NFOs managed by fund managers with a strong recent track record. However, investors should look beyond past performance and assess the fund’s long-term investment strategy and risk profile.

[Read: Power Your Portfolio: 5 Sector & Thematic Funds to Consider Around General Elections]

Investing in NFOs: A Cautious Approach

While the sheer number of NFOs might present an attractive array of investment choices, it’s vital to avoid getting swept away by the initial hype. Here’s why taking a cautious approach is essential:

  • New Doesn’t Always Mean Better: Just because a fund is new doesn’t assure stellar performance. A track record of success is crucial. Look for fund houses with a proven history of managing similar investment strategies and delivering consistent returns.
  • Focus on Investment Philosophy: The core of any investment decision should be aligning your financial goals and risk tolerance with the fund’s investment philosophy. An NFO focused on aggressive growth might not be suitable if you are nearing retirement and need stability.
  • Scrutinise the Fund Manager: The fund manager’s expertise significantly impacts the fund’s performance. Research the fund manager’s track record in managing similar funds. Look for consistent performance across market cycles, not just during bull runs.
  • Expense Ratio Matters: The Expense Ratio is the annual fee charged by the fund house to manage the fund. Lower expense ratios translate to higher returns for you. While a new fund might initially have a lower expense ratio to attract investors, be wary of significant increases in the future.

Should You Invest in an NFO in 2024?

Before you invest in any NFO, a thorough evaluation is crucial. Here are key factors to consider:

– What is the fund aiming to achieve?

– Does it align with your own financial goals?

– What asset classes will the fund invest in?

– Does the fund’s asset allocation strategy (mix of stocks, bonds, and other assets) correspond to your risk tolerance?

In many cases, a well-established mutual fund with a proven track record might be a safer option. However, NFOs can be a good option if the theme is unique and aligns perfectly with your investment goals. However, due to the lack of track record and potential drawbacks, it’s often recommended to be cautious and wait for some time to see how the NFO performs before investing.

Looking Ahead:

The Indian mutual fund industry is well-positioned for continued growth. As financial literacy improves and digital adoption increases, the industry can reach new heights. Continuous innovation in product offerings, investor education initiatives, and leveraging technology will be key factors driving future success.

This article first appeared on PersonalFN here

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