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New Fund Offers (NFOs) after announcement of entry load removal – Should you invest?

After it has been announced that there would be no entry load for investors putting their money in mutual fund (MF) schemes, many fund houses have come up with NFOs before the entry load ban comes into effect. What should you do?

The Securities and Exchange Board of India (SEBI) has recently announced that investors would not have to pay any entry load when they invest in MF schemes. This removal of entry load will come into effect from August 1st, 2009.

(For more on this and the effect of this move on you, please read “No entry load for mutual funds (MFs) – How SEBIs move positively impacts you”)

Following this announcement, many mutual fund houses have announced New Fund Offers (NFO).

Some examples are:

  • DSPBR World Energy Fund (by DSP Blackrock Mutual Fund)
  • Franklin Build India Fund (by Franklin Templeton Mutual Fund)
  • Religare Business Leader Fund (by Religare Asset Management Company – Karvy)
  • Sahara Super 20 Fund (by Sahara Mutual Fund)
  • Quantum Equity Fund Of Funds (by Quantum Mutual Fund)
  • JF Greater China Equity Offshore Fund (by JPMorgan Mutual Fund)

(This is a sample list. The analysis done in this article applies to all NFOs currently going on)

So, should you invest in these NFOs?

Why the flurry of NFOs?

Before we talk about whether you should invest or not, let’s see why suddenly there has been a rush to launch new fund offers.

You won’t pay for a scheme’s marketing expenses any more

After 1st August 2009, mutual fund houses would not be able to collect any entry load (which was about 2% of investment) from you. This was the money that was used to compensate MF agents and distributors that brought in business for the fund houses.

Basically, the entry load was used to pay for the marketing expenses.

Since there would be no entry load going forward, all fund houses would have to shell out the marketing expenses from their own pockets. And this is not a very attractive proposition for them!

That’s why the mutual funds want to collect as much money as they can before August 1st so that they can charge the entry load on the money collected! That is, so that they can charge you and can pass on the commission to the agents and distributors.

Distributors / agents would not be very forthcoming to sell MF schemes

After the removal of entry load, the agents selling MFs would not get a commission form the fund houses. Instead, they would charge a fee to their clients for the service that they provide.

It is being assumed that since these agents would not be getting an assured commission, they would not be too willing to sell MF schemes after 1st August.

Instead, they would focus more on selling insurance products like a Unit Linked Insurance Plan (ULIP) which provides them hefty commissions.

(For more on this, please read “No entry load for mutual funds (MFs) – How SEBIs move positively impacts you”)

Should you invest in these NFOs?

Ok, so we come to the original question: Should you invest in these NFOs?

You should invest in a mutual fund scheme because it is worth investing in. It should have an investment philosophy that you believe in. And it should have a good track record of consistent performance.

New Fund Offers (NFOs) do not fit this description, and therefore should be avoided in general. The only exception is when an NFO is truly different from all existing schemes (which is very, very rare!).

And you should definitely not invest in an NFO because the units are available at Rs. 10 or “at-par”.

(Please check out “When “at-par” is not so good: New Fund Offer (NFO) versus existing MF schemes” for more)

So, in conclusion, any NFO should be avoided. The current crop of NFOs should be especially avoided because if you wait for just a few days more, you would not have to pay the entry load!

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