Is It Worthwhile Investing in Equity NFOs At a Market High?
December 1, 2022 Mutual Fund
The Indian stock market is once again scaling at an all-time high. On November 24, 2022, the S&P BSE Sensex set a new record by closing above 62,000 for the first time and the Nifty index crossed 18,500. The US Federal Reserve meeting minutes revealed the rate-setting panel was more amenable to a slower pace of future rate hikes, which boosted bullish sentiment and benchmark indices held positive momentum.
The first half of 2022 was highly volatile and gut wrenching not just due to geopolitical tensions but also the fears of spiralling inflation and interest rate hikes. However, Indian markets have made a significant recovery in the second half of the year. India is possibly the only market to have given positive returns in the September quarter i.e. Q2 of FY 2022-23. The above-mentioned indices have outperformed other Asian equity benchmarks in the current market environment as the drop in oil prices brought on by broad shutdown demonstrations in China reduced inflation predictions in India and counteracted concerns about contagion in industrial stocks.
As per Year-to-date (YTD) data, the sectors such as metal, auto ancillaries, consumer durables, financial services, etc., have significantly contributed to the benchmark gains during the year, however the Oil & Gas and Energy sector rallied the most and have been a noticeable standout in the market. Contrary to that, sectors like information technology (IT), communication services and pharma underperformed since the beginning of this year, as the value of future earnings were impacted by rising interest rates increasing the cost of capital.
Graph 1: S&P BSE SENSEX Rallies To New Heights
Data as of November 29, 2022
(Source: ACE MF, PersonalFN Research)
Graph 2: NIFTY 100 Scaling at all-time High
Data as of November 29, 2022
(Source: ACE MF, PersonalFN Research)
Whenever the market crosses a psychologically-significant mark, many investors, especially mutual fund investors, are willing to make changes to their portfolio and sell or buy investments to benefit from the fluctuations in the market. In addition, some investors wait for a market correction to begin their investment journey, and however, it may result in a loss of opportunity.
This is why, despite the dynamic market conditions, you should continue to invest systematically. Systematic Investment Plans (SIPs), which are considered to invest in mutual funds, are appropriate in this situation of uncertain market environment. Sure, there will be a few hiccups on the way, but the general market trajectory is going to be largely upward-looking.
According to the Association of Mutual Funds of India (AMFI), the MF industry’s trade body, the monthly inflows through SIPs into mutual funds is at its highest – at a little over Rs 13,000 crore a month, as per the October 2022 figures. The bulk of this goes into equity funds. Clearly, retail investors are excited about equities, despite a sharp correction in global equities and domestic market peaks.
Should you invest in equity mutual funds at a market high?
Equity mutual funds are designed to offer capital appreciation over the long term by investing a major part of their corpus into equities. These funds have higher risks as compared to other schemes. Since equity funds invest primarily in stocks, volatility in the stock markets impacts the returns offered by them.
When the markets are rallying, stocks and indices are rising too. Hence, the performance of most equity mutual funds is higher during market peaks. While investors who have already invested in equity funds reap the benefits during such rallies, people who are planning to invest when the markets are at their peak can get sceptical. When you invest in equity funds, trying to time the market can be detrimental since it turns the focus away from the fund’s long-term performance and onto the market’s volatility, which can result in scepticism or erroneous choice of the equity scheme.
The objective of investing in equity mutual funds is to beat inflation and accumulate a sizable corpus to meet your long-term goals. Keep these points in mind; it will help you to focus on your goals and take your eyes off the market. You should remember that your equity mutual funds invest in stocks. When the market is at a low, you can buy more units of the scheme. Whereas when the market is at an all-time high, you will end up with lesser units. However, if you invest regularly in a systematic way through SIPs, you will be able to average your purchase cost, benefit from the power of compounding and get more units. This will also help you to maximise the returns. Remember, equity mutual funds are excellent long-term investment tools. And, over time, volatility evens out, offering good potential for returns.
Given that, there also exists a lot of ambiguity amongst investors regarding whether to invest in existing equity mutual fund schemes or in Equity New Fund Offers, also known as NFOs.
Considering the prevailing market conditions, many mutual fund houses have tapped into this market sentiment and launched several NFOs. Also, after the temporary ban of three months by the SEBI on the launch of new funds was lifted, several AMCs introduced NFOs to take advantage of the market trends.
NFOs are a good investment opportunity for investors as they are available at a cheaper rate as compared to investing based on the NAV of the fund. The fund houses tap into this thinking of the investors making the fund lucrative. However, many investors invest in NFOs after being persuaded, even though they are unaware of the functioning of NFOs.
Is it actually a good idea to invest in NFOs?
Let’s first understand the things one needs to consider while investing in an NFO:
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Objective of the NFO – The objective of the fund should be in line with the risk returns perception of the investors to ensure a profitable portfolio. Do note that for a Mutual Fund to be a worthwhile addition to your portfolio, your investment objectives must coincide with that of the fund.
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NFO theme – NFOs are based on a specific theme which can be capital appreciation or value investing, or a growth-oriented fund. Funds can therefore select assets based on a specific sector to tap into the current market swing or the uptrend.
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Credibility of the fund house – An AMC that has consistently launched good mutual fund schemes that have historically performed well will definitely attract more investors. Check the background of the fund management team, the kind of funds they are managing and their returns generated. If it has a proven track record, it is possible that the NFO will be managed prudently and perform well.
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Investment amount – NFOs have a definite minimum investment amount that may be different from the amount when the fund is open for a regular subscription. If the minimum subscription amount is higher than you had anticipated, you may consider opting for the Systematic Investment Plan (SIP) if it is available in the particular NFO.
Hence, it is important to understand these parameters and ensure that the investment in an NFO is in line with the expectations of the investors as well as their financial objectives. NFOs are an excellent opportunity to re-evaluate the investment portfolio and include new funds that may be more dynamic and can help in meeting the investment goals at a faster pace. However, it is advisable not to be carried away with the market buzz.
While investing in an NFO, you must ensure your risk tolerance, and this is the most crucial factor. Make sure the risk profile of the fund aligns with your level of risk tolerance, investment horizon and goals. In case your risk tolerance is moderate to low, you shouldn’t invest in any NFO that suggests high risk. Therefore, it is essential to consider all relevant factors before investing in NFOs.
Now that you have understood the factors to consider before investing in any NFOs, you must be wondering whether you should invest in Equity NFOs during a market high.
Are Equity NFOs a worthy investment option at a market high?
One of the main benefits of investing in NFOs is that they allow investors to test out novel investment strategies and themes that the AMC hasn’t yet looked into. This may be in the form of gaining exposure in a new asset class, theme, or index, which may have not been represented by any of their existing schemes. Additionally, this new scheme may be disruptive in character and focus on a certain industry with exceptionally high growth potential but hasn’t been discovered by the market yet and can give a first-mover advantage to investors.
However, as mentioned earlier, equities are highly volatile in nature, and changes in market trends have an impact on their returns. Equity NFOs invest a majority of its assets in direct equities which are considered highly risky in nature. When it comes to existing mutual funds, one feature which differentiates them from NFOs is that they have an existing track record in the form of performance as compared to a benchmark, returns delivered and consistency, which a newly offered fund does not have.
Thus, investing in equity NFOs is like a shot in the dark, and you may only consider it if you are convinced by the fund, the risk involved in it and the diversification benefit it brings to your portfolio. If you are keen on investing in equities, it will be wise to opt for an existing equity mutual fund scheme that has a proven track record instead of going for something new or unpredictable like an Equity NFO. Although from an investment perspective, it may seem wise to invest in the NFO that is a unique offering at a low cost and can be a good fit in your portfolio, wait for some time to see if it the theme or investment strategy plays out as intended.
To conclude…
Market highs are usually accompanied by fund houses launching sophisticated offerings. You might come across a lot of New Fund Offers (NFOs) during this time. These offerings might promise sky-high returns. However, you shouldn’t get enticed by the lucre, especially when the product offering is not transparent. Ensure that you understand what you are getting into before investing.
Remember, choosing the right investment should depend on your investment preferences and objectives and not on external market conditions. Regardless of the market sentiment, you should focus on the fundamentals and choose the fund that will assist you in reaching your financial goals.
This article first appeared on PersonalFN here
