Rush of new fund offers

As equity markets continue to scale new highs, the mutual fund industry is on a new fund offer (NFO) spree. From January 2021 till August 2021, the industry has raised Rs 60,366 crore through NFOs. These include debt funds, but the majority of these launches have been in the equity funds space.

One of the reasons for the rush of NFOs is due to the sharp rally that we have seen post the crash witnessed in 2020. Also, fund houses are filling the product gap created post recategorization. We are seeing some unique fund launches in the recent past.

We are witnessing traction in three categories which are passive funds, Environmental, Social and Governance (ESG), and international fund of funds space.

Global rush  

While we have had international fund of funds for a long period of time, there is a renewed interest in this space of late. Another trend we are witnessing is that investors are taking a bet on themes/indices either through active or passive funds in the international funds category.

Here are some of the recent fund launches and the amount raised by them during the NFO period:

  • Axis Global Innovation: Rs 1,626 crore
  • HSBC Global Equity Climate: Rs 622 crore
  • SBI International Access US Equity: Rs 557 crore
  • Mirae NYSE FANG + ETF: Rs 538 crore
  • Kotak Nasdaq 100: Rs 233 crore
  • BNP Paribas Aqua: Rs 84 crore
  • Axis Greater China Equity: Rs 30 crore

What should investors do?

Active managers in U.S. have had a hard time beating the benchmark. If you are a first-time investor you can consider passive international funds. But there are some good active funds also. Investors can have both active and passive international funds in their portfolios.

Thematic Funds

Another area where we are seeing a lot of traction is in the thematic space. To start with, investors should focus on their overall asset allocation. Passives are a great way to build portfolio, but your core holdings should be in diversified indices. There is a fair bit of interest in sectoral passive funds as technology and healthcare stocks have done exceptionally well in the pandemic.  The problem with thematic funds is that most investors get into such funds probably late when the theme has already played out. When you miss the bus, the experience is different from your expectations. Passive funds are a good way to take exposure to a theme/sector if you are unable to choose an active fund but one needs to understand the nuances of these sectors. One needs to tread carefully while investing in sectoral passive funds.  It is better to invest the predominant portion of your portfolio into actively managed funds and keep the exposure diversified passive funds minimal. If one needs to take exposure to sectoral passive funds limit your exposure to 5% and remain invested till the theme plays out.

Rise of ESG

Besides passive and thematic funds, (ESG) is another area that looks promising. At Morningstar, we are believers in ESG. We have seen a flurry of ESG launches in 2020. Asset managers are already integrating ESG parameters into their overall investment process. We believe India will grow in leaps and bounds in ESG investing.  It is about time that investors start including ESG as part of their core allocation.

The proof of the pudding is what has happened globally. We have a very limited history of ESG funds in India. But we have seen the kind of downside protection some sustainable funds have offered during the COVID-19 crash in 2020 in international markets. The typical misconception is that you trade off a portion of your returns. But that’s not the case.

Excerpts from CNBC TV18 interview. Watch the full interview here.

Source: Morningstar India Website