Why should investors stay away from new fund offers in 2025? Experts weigh in | Mint

The year 2024 saw the launch of 200 new fund offers (NFOs) with September and October contributing 50 schemes. It is common among retail investors to invest in a new fund offer since they assume that the price at which a scheme is available is invariably tempting.

However, this is often not true. Experts urge investors to avoid being too proactive while investing in a new scheme and refrain from investing at the launch itself.

According to them, an established fund with a long history of performance, which has undergone bull and bear runs and continues to adhere to its investment philosophy, is more suitable for investing.

Here we give three key reasons for not opting for an NFO.

I. Assessing performance

One key reason for not choosing to invest in a new fund offer is that it does not allow investors to assess past performance. Oftentimes, mutual fund houses tend to launch schemes that invest in stocks to which an investor may already have a decent exposure through other schemes.

“If the NFO is not significantly different from existing funds, it may be best to avoid it. Since NFOs lack a track record and offer no way to assess style drift (deviation from the stated strategy), evaluating them can be challenging,” says Alekh Yadav, Head of Investment Products at Sanctum Wealth.

Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services, echoes similar sentiments when she says she does not advise her clients to invest in a new fund offer, particularly a thematic or sectoral fund.

“Mutual fund investments can help create long-term wealth and achieve financial freedom. But they carry market risk as well as fund manager risk. That’s why at the time of opting for a mutual fund, investors should study its features, performance, type and suitability with the financial goals tenure and investor’s investment pattern — and most of these are not possible in a new scheme,” she says.

II. Sectoral trend may not last

Another reason to skip an NFO is that the time of starting a fund, particularly a sectoral or thematic one, may not be correct.

“Several fund houses launch NFOs after a theme has already peaked, making it easier to raise assets but potentially limiting future returns. Consequently, investor returns may fall short of expectations,” says Alekh Yadav

Investors should refrain from rushing into new fund offers and instead evaluate a scheme’s performance over time before deciding to invest, says Soumya Sarkar, Co-Founder, Wealth Redefine.

“Most fund houses tend to launch NFOs to fill gaps in their existing offerings. For instance, if a particular sector like IT, logistics, or energy is doing well and they don’t have a fund catering to it, they may introduce an NFO focused on that sector. However, this strategy doesn’t always yield favourable results. If an NFO is introduced at the tail end of a sector’s growth cycle, it may not perform well in the long run,” adds Sarkar.

III. NAV is not the right criteria

There is a misconception among investors who –at times– believe that the initial NAV (price at which mutual funds are available) is like the issue price of a stock during an IPO. But this is far from true.

“Some believe that investing in an NFO at its launch price of ₹10 means they are buying it at a cheaper rate. This is a myth. The performance of a fund depends on its returns, not its Net Asset Value (NAV). For example, a fund with an NAV of ₹20 that grows to ₹24 provides a 20 per cent return, whereas a fund with an NAV of ₹10 that grows to ₹11 provides only a 10 per cent return. Thus, the NAV itself should not be a deciding factor,” adds Sarkar.

In some cases, NFOs that fail to perform well may even see their NAV drop below the initial offering price, potentially leaving investors with losses.

Emerging trends

Meanwhile, some experts believe that investing in new fund offers can be beneficial in active schemes where a fund is trying to tap into emerging trends such as digitalisation or new-age business sectors.

“At the core of mutual fund evaluation lies stock selection and the competence of the fund management team. NFOs hold merit in specific scenarios, especially when they tap into emerging trends like digitalisation, healthcare advancements, or new-age business sectors. In such cases, NFOs can provide opportunities to invest in innovative themes that may not be accessible through existing schemes. While these funds lack historical performance data, the expertise and track record of the fund management team in similar categories can offer valuable insights,” says Sachin Jain, Managing Partner, Scripbox.

Suggested course of action

So, what is the way forward? Experts recommend that investors gather more information and assess the scheme’s performance for a considerably long period before deciding to invest in a scheme. “Therefore, it’s prudent to give the fund time—around six to seven months—to analyse its performance, sector trends, and the stocks the fund manager has chosen,” adds Sarkar.

“Ideally, investors should assess the performance of an NFO before committing funds. However, performance should not be the only criterion. Other critical factors to consider are the fund’s investment strategy, adherence to its stated philosophy, and portfolio construction – and they also become clearer over time,” says Yadav.

Once investors evaluate a scheme over time, they can ensure that they are aligning their investments with the right opportunities and long-term financial goals.