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New Fund Offering (NFO).. Should you invest?

Shwealth

IPO in equity markets gets investors really excited with most IPOs being oversubscribed. A majority of these list at a premium and generate good returns for investors. But are NFOs in Mutual Fund also that exciting in terms of returns? They definitely do not list at any premium, but in this blog we try and explore whether they give good returns in the short term i.e. over 2 quarters or a year.


We will primarily look at NFO in the midcap and smallcap space since 2020. We will compare the returns they have generated with returns provided by the respective index fund for the same period after listing.

                                                             Table 1: NFO in Midcap

  Source: AMFI, Shwealth analysis

Note: *If a fund is launched in Aug 2021, then 2 quarters from launch would mean till the end of March 2022 and 1 year would mean upto September 2022

Returns are total returns since launch and not annualized

For Index returns, we have taken returns of Motilal Nifty 150 index fund

 

As we can see from the table above, only Whiteoak midcap fund has managed to beat the index fund return for both the 6 month and 1 year period (only marginally). For funds that have completed 2 years upto June 2024 quarter i.e.  ITI midcap and Union Midcap, they have failed to beat the Midcap index for a 2 year timeframe also from launch.

 


Table 2: NFO in Smallcap

              Source: AMFI, Shwealth analysis

Note: *If a fund is launched in Aug 2021, then 2 quarters from launch would mean till the end of March 2022 and 1 year would mean upto September 2022

Returns are total returns since launch and not annualized

For Index returns, we have taken returns of Motilal Nifty 150 index fund

 

As compared to midcaps, smallcap NFOs whenever they are beating the index since launch it is by a good margin. Here too only 50% of the NFOs are beating the index. However, if we stretch the returns data to 2 years, then PGIM drops out and only Mahindra smallcap and Bandhan smallcap are beating the index fund.


Overall for both midcaps and smallcaps it does not seem like NFOs have a high probability of providing better returns than the index. In fact there are many passively managed funds in the space that have beaten the respective indexes and hence would seem like a better idea to invest in the funds with proven track record rather than investing in a NFO in the midcap and smallcap segment.



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