As a general rule, Certified Financial Planners and other mutual fund advisors, desist from recommending a new fund or scheme to their clients. They prefer to opt for tried and tested schemes, mainly due to the following reasons:
- These schemes have a long track record behind them and have displayed their investment-worthiness over different market cycles.
- In many cases, the fund manager has not changed for long periods. This lends stability and style-purity to the scheme.
- Such schemes are closely tracked and rated by reputed mutual fund research agencies. Besides, many of them also win some award or the other periodically, thereby, ensuring that they enjoy top-of-the-mind recall.
- Many of these schemes enjoy certain critical mass in terms of Assets Under Management (AUM). Thus, the hazard of destabilising outflows is not very high.
Also, since advisors have a fiduciary role to play, they often feel that it is better to be prudent rather than adventurous in their scheme selection.
Apart from certain positive reasons for their choices, certain negative reasons too play a part:
- There have been exuberant periods (say, 2000 and 2007) where New Fund Offers (NFOs) of various hues have received overwhelming response, but whose subsequent performance left a bitter taste in the mouth. Advisors who recommended some of these blockbuster NFOs now exhibit the 'once-bitten-twice shy' syndrome.
- There was a time when the Regulator permitted mutual funds to defray the issue expenses over a certain period in the case of the NFOs of close-ended schemes. This led to mutual funds offering hefty commissions to distributors, who, in turn, went overboard recommending these NFOs. Now, that such defraying has been prohibited, the enthusiasm of distributors, too, has waned.
While opting for old warhorses is a good strategy overall, there may be times when it is worthwhile to look at an upcoming NFO more closely. But what should one look for ? Here are a few pointers:
- The most obvious reason is, if the NFO offers something which the current crop does not. Such as: Investing in new markets / asset classes. However, needlessly exotic / niche investment mandates should be viewed with a degree of scepticism.
- If the NFO offers a low-cost approach to investing in an existing asset-class, say, as in an Exchange Traded Index Fund.
Since an NFO does not have any past performance record, the next best option to judge, what may be in store, is to have a closer look at the Sponsors:
- The quality of the Sponsor : As money management is a profession, it is vital that Mutual fund Sponsors enjoy a clean image. They should not have been penalised by any Regulator for misdemeanours. Also, a Sponsor Company with a single dominant promoter could be seen as more stable than one in which has a motley group of financial investors, who may be keen to cash out as soon as possible.
- The focus of the Sponsor : Are the sponsors already undertaking 'money-management' related activities in any other avatar, say, through a Portfolio Management Scheme (PMS)? If yes, are they willing to share its performance with the general public on their website (not on the mutual fund's website, as that is prohibited). It will be heartening if they indicate that, going ahead, all other schemes which compete with the mutual fund, will be discontinued.
Also, are the Sponsors engaged in a slew of diverse activities or is this their only activity ? If it is the latter, it should provide greater comfort to an advisor, as it denotes a focussed approach.
- The investment process : A scheme which outlines its investment process in black-and-white, scores over one which does not. This is because, once any commitment is given in writing, there is an implicit tendency to stick to it, as deviating from it will be perceived to be a sign of weakness.
- The investment management team : If a new mutual fund's investment team has worked together for a long period (say, either in the Sponsor Company's PMS outfit or at any other asset manager) there will be a greater degree of understanding between them, as compared to a team which has been poached from disparate sources. This should also be seen as a plus point.
Besides this, it will be a comforting factor if the promoters / employees indicate how much they plan to invest in the scheme. This will display their commitment to aligning their interests with those of the outside investors. Finally, a scheme which avoids giving very high incentives to distributors and eschews over-the-top advertising should be viewed positively.
However, even if a scheme passes all these tests, it is prudent to only allocate a small portion of your funds to it at the outset. You may increase your allocation at a later stage, based on its performance.