Friday, March 15, 2024
HomeMutual FundSince past performance doesn't dictate future returns, why not buy MF NFOs?

Since past performance doesn’t dictate future returns, why not buy MF NFOs?


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.

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.

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