What upcoming NFOs tell us about the state of mutual funds industry in India

• Bajaj FinServ Large Cap Fund
• Groww Nifty EV & New Age Automotive ETF FOF
• HDFC NIFTY500 Multicap 50:25:25 Index Fund
• ICICI Prudential Nifty Metal ETF
• Invesco India Manufacturing Fund
• Kotak Nifty Midcap 50 Index Fund
• Motilal Oswal Business Cycle Fund
• SBI Innovative Opportunities Fund

If I were to put on my hat as a value investor, who aims to buy when others are not yet rushing in, then perhaps the only fund that makes the cut in the list on Amfi (Association of Mutual Funds in India) website now is the large-cap fund.

However, from an asset allocator’s perspective, even a large-cap fund might not be the best choice for every investor. Why?

Opportunities shift. Today the opportunity is in large cap funds, tomorrow it may be in some other segment. What do you do then? Do you redeem and re-invest, which again involves timing, taxation and the whole operational bit of things?

I wish to go back to the point I make in my ‘Contramoney’ column time and again. Pick the right fund management team, and then give them complete flexibility to invest. That’s probably what people call flexicap or focussed funds.

Though not many are paying attention, we will continue to push this idea.

Coming back to NFOs

Why is there a rush to launch these funds? Well, you could argue there is demand for such funds. From whom? The gullible retail investor, in all likelihood.

Should they invest in such funds at these levels? While this is tough to answer, it would be safe to say that for most investors, this makes little to no sense. Here’s why.

Well, historical returns delivered by these sectors will have ZERO impact on future returns. In fact, if at all, the future prospective returns are suppressed to the extent the returns have been pulled forward by the market (on account expansion of valuation multiples).

The other point, which is again very odd, is that people often do SIPs in such thematic funds. Now, we can agree that such themes are not perpetual.

Some of the fund managers of these schemes even come on TV to say the leaders of the next stock market rally will be different!

So, by that logic, unless you are in that tiny minority of investors who can time entry and exit into a sectoral/thematic fund, that is, get in cheap, and then get out before the market mood about that sector/theme changes, such funds are definitely not for you.

Yet, the market is awash with thematic funds. I recently even saw a defence fund being launched! And I bet more such funds are on the way.

Last year, it was almost entirely small-cap and midcap funds. Next year, it will have a new theme.

Sometimes, I wonder how all this lines up.

There are fund managers who come on TV and talk to retail investors and make all the right comments. Yet, the schemes that they come out with are completely out of sync with their comments!

And this directly addresses the point I want to make. The state of the mutual fund industry, in general, is that ‘sab sahi nahi hai’ (not everything is okay).

There are many well-intentioned people. But as a very famous fund manager told me about 20 years ago, somewhat dejectedly: NFOs are a compulsion of distribution. And I think that reality persists even today, sadly.

Too many funds are being pushed down the chain to raise new money. And even more funds will be pushed on you, dear reader, in time to come. Beware!

You should always consult your personal investment advisor/wealth manager before making any decisions.

Rahul Goel is a finance and publishing professional with over 25 years of experience in the industry. You can tweet him @rahulgoel477.

Related read: Investors start to shun small and midcaps, but then fall for another poor idea