Five factors to consider before investing in new fund offerings

As the number of investment funds launched is increasing rapidly, around 14 new fund offers (NFOs) are currently open for investment. As investors look to take advantage of these opportunities, it is critical to approach NFOs with a critical eye.

Shaily Gang, Head of Products at Tata Asset Management, lists five key factors you should consider before committing your hard-earned money to an NFO.

Evaluate the unique value proposition

Investors should first evaluate the differential advantage that the NFO offers.

Gang points out: “There could be an existing category, but the NFO could introduce a unique portfolio construct.”

For example, an active fund NFO that focuses on high-risk, high-reward stocks might be attractive to those with a higher risk appetite.

Conversely, an NFO that emphasizes income stability in equity funds or maintains a non-AAA allocation in bond funds could appeal to more conservative investors.

Identify demand drivers

It is important to consider the underlying themes or sectors that the NFO is targeting.

“Certain sectors such as automotive, infrastructure or renewable energy are likely to perform better than the overall market due to strong demand drivers,” says Gang.

These themes often align with government initiatives and economic trends, making them potentially lucrative investment opportunities.

An NFO that captures these trends through active or passive strategies could be worth exploring.

Look for unique constructs

Investors should look for NFOs that create new index constructs.

Gang explains, “A unique index that captures specific market segments can be a compelling investment.”

For example, an NFO that applies momentum factors to a new universe or sector can provide unique exposure that was not previously available.

Such innovative designs can provide an advantage in a competitive market.

Think about complex strategies

Some NFOs involve strategies or asset classes that are difficult for individual investors to manage alone.

“Investing in commodities or conducting complex arbitrage transactions can be challenging for the average investor,” emphasizes Gang.

Multi-asset funds that include commodities or track momentum indices can simplify the investment process and make sophisticated strategies accessible through an NFO.

Evaluate the expense ratio

Finally, Gang emphasizes the importance of an appropriate expense ratio.

“Always compare expense ratios within the fund category,” she advises.

A lower expense ratio can have a significant impact on net returns over time and is therefore a crucial factor when selecting an NFO.