Have the NFOs delivered?

Equity new fund offerings (NFOs) may have slowed down over the last one or two months, yet thanks to a slew of NFOs over the last two years from fund houses looking to augment their corpuses and diversify their product basket, the number of diversified equity funds soared by 107 funds to 303 funds, an increase of 55 per cent. The big question: whether these new funds have delivered what they promised?

Surprisingly, one-year returns of NFOs have been better than average. Out of the top 10 equity funds in the last one year, three are NFOs. The Standard Chartered Premier Equity Fund ranks an overall fifth among all equity funds with returns of 70.2 per cent, while ICICI Prudential Services Fund stood at seventh position overall with returns of 66 per cent. The 10th spot was bagged by Sundaram BNP Paribas Capex Fund with returns of 61.2 per cent.

But within the NFO category, the performance was satisfactory. Out of 47 NFOs, 18 (38 per cent) beat their respective benchmarks, whereas 25 (53 per cent) managed to outperform the Sensex. But in the larger diversified equity category as a whole, NFOs lagged.

Out of 189 equity funds, 92 funds (49 per cent) bettered their respective benchmarks, and 119 funds (63 per cent) outperformed the Sensex in the past one year.

A closer look at the better funds suggest that a focus on infrastructure, power, banking and media have dominated the rankings. NFOs with all or part of these sectors have scored over others. The best performing NFO, Standard Chartered Premier Equity Fund, has delivered returns for its investors from smalland mid-cap stocks. Says Kenneth Andrade, Vice President (Equity), Standard Chartered Mutual Fund: “Identifying stocks earlier than the market has helped us reap the rewards. We will continue to focus and pick growth stocks that have huge value in them.”

On the other hand, ICICI Services Industries and Sundaram BNP Paribas Capex Opportunity Fund have different investing styles. ICICI Services Industries has a diversified blend of largeand mid-caps with the top 10 accounting for 33 per cent of the total corpus. The thirdplaced NFO, Sundaram BNP Paribas Capex Opportunity Fund, is large-cap-centric with the top 10 accounting for 54 per cent of the total corpus. Says Srividhya Rajesh, Fund Manager, Sundaram BNP Paribas Mutual Fund: “Infrastructure is still an untapped sector. And with the focus on them, the large-caps will benefit over small-caps.”

Among the other NFOs, CanBank Infrastructure Fund, Kotak Tax Saver, Birla Infrastructure Fund, ICICI Prudential Fusion, ICICI Prudential Emerging STAR, Sahara Infrastructure and Kotak Lifestyle topped the list, beating the Sensex with returns ranging from 49-57 per cent. CanBank Infrastructure has a concentrated portfolio of large-cap stocks. Says Umesh Kamath, Fund Manager, CanBank Mutual Fund: “We don’t hesitate to book profit and reduce exposure in stocks when our targets are achieved.”

On the contrary, Kotak Tax Saver (earlier known as Kotak ELSS Fund) has a widely diversified portfolio that includes small stocks like Panacea Biotec and SKF Bearings among its top 10 stocks. “The close-ended structure of the fund allowed us to take bigger bets in mid- and small-cap stocks with a potential to become tomorrow’s large-caps,” says Nikunj Doshi, Fund Manager, Kotak Mahindra Mutual Fund. On the other hand, the Birla Infrastructure Fund is more balanced with a mix of largecap and mid-cap.

So, are NFOs a good option for investing? The answer is mixed. If the NFO offers a different niche over an existing fund, then it makes a case for investment. “Look at NFOs only if there’s no similar fund in your existing portfolio,” says Nilesh Shah, CIO & Deputy Managing Director, ICICI Prudential Mutual Fund, adding, “Otherwise over the long-term, it would be sensible to invest through funds that have a wellestablished track record.”