I received a mail from Sankha Deep Das, a reader, asking if it is advisable to invest in NFOs or in age old fund that exists above 5 years in market. He mentions that his agent says that “as the fund is new so it has immense potentiality to give good returns and as HDFC etc are very old so it does not have that much ability to give good return”
My response: The agent is trying to fool. Low or high NAV does not affect the return. You may get lesser number of units for a higher NAV but it doesn’t really matter.
Let me simplify a bit more by giving an example. Imagine two funds at NAV Rs 10 and the other at Rs 100. Let’s say that you invest Rs 10000 in each of them. In the first fund, you get 1000 units while in the second one, you get only 100 units.
Let’s also assume that both the funds give a return of 10%. So the NAV for the first fund is Rs 11, while it is Rs 110 for the other fund. Now if you sell both of them, you get the same amount. That is no. of units multiplied by NAV. It’s Rs 11000 in both cases.
Sidenote: I am uncomfortable simplifying the things so much as I feel I might be hurting the intelligence of some of my readers! But I guess, I’ll risk that!
Further, I am afraid that the agent will get more commission from NFOs. From an investor point of view, NFOs are to be totally avoided. The older fund schemes have a history of performance that you can judge. NFO does not have that.
Going for a NFO is advisable only if there’s no such fund targeting the sector that the NFO is targeting. And you want to be part of that sector.
What do you think about NFOs? Do you have to add anything?
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Hi Ranjan,
While comparing old fund with new fund, you kept only NAV as a benchmark, which seemed very partial to me. Some of the other factors are as follows:
1. The new fund will have more liquidity, hence more opportunities to invest in appropriate stocks.
2. The NFO might belong to a good fundhouse and a well known fund manager with good performance.
3. The old funds managing a huge pile of assets might have exhausted/reached a limit of good opportunities, hence, they might not give that much better returns
4. For some in itial years, the agency costs are kept minimum for funds, hence, less loss of money.
Ranjan,
You have hit the nail on the head.
-more than high/low NAV pedigree of fund is important
-commissions in NFO is higher so agents push it.
-I like to point out that only after entry load was removed that Fund Houses started advertising their fund performance stats. Prior to that higher commissions (ongoing and NFO) meant higher subscriptions.
My 2 cents..
-rakesh sahay
@Sunny, Thanks for your views. The point was that the Agent was pushing it for the wrong reasons and with the wrong logic.
Moreover, as far as I know, the costs are more for NFOs. They are amortized over a longer period and that’s the reason they are invisible!! I don’t really believe the points you mention at 1 & 3. It applies equally to old and new.
With regards your point 2, a good fundhouse and a well known fund manager makes sense. But why not invest in their older schemes that comes with a past performance. New funds make sense if they are targeted at a specific sector which you are sanguine about.
@Rakesh, Your 2 cents are worth dollars, dear!!
You mention agent commission for NFOs. Didnt the commission get done away with along with the entry load?
Regds, Daksha
@Daksha
They are still getting paid as part of the marketing expenses! And then there is the trail commission which depends on AUM and not the amount you invest every year.
For example, if you pay Rs 1 lac and stay invested for 10 years, the agent gets a trail commission every year even if you don’t add anything. Unlike the insurance premium where the agent gets paid for every premium paid.
So the root problem – the differential commission – has not been addressed. And agents will continue to recommend a fund based on their gain and not the clients needs. Caveat Emptor. Thumbs down to the regulator.
@Daksha,
To my mind,
commission is not the biggest issue. Read this http://ranjanvarma.com/incentives-structure-for-financial-advisors/
Regulators should not micromanage. Individuals need to take some responsibility for their decisions.
Do we need to ban commissions? Every industry will vanish. commission is the distribution cost. Can we say what’s the commission on the soap we buy and we don’t want to pay that?
Attempts by the regulator to stop mis-selling cannot succeed without the involvement of the individual investor like you and me.