You can't teach an old monkey new tricks. -- Anonymous

The solution lies in teaching a new monkey old tricks. -- Personalfn

At Personalfn, we believe that most NFOs (new fund offers) are a case of new monkeys performing old tricks in an equally amusing manner. Despite the SEBI (Securities and Exchange Board of India) diktat that requires the Board of Trustees to 'certify' an NFO as new, we still find 'new monkeys performing old tricks.' We have analysed some of the NFOs launched in the recent past to determine if they have added any value to the investor's portfolio.

While selecting NFOs, we have employed some filters. To begin with, we have only selected equity NFOs since they attract maximum investor attention and net assets. To be fair to the NFOs under review, we have selected only those that have a track record of being 'fully invested' for at least 12 months.

Given that funds can take upto 6 months from launch for being fully invested, we have considered NFOs that have been in existence for at least 18 months. Of course many of these NFOs are still not necessarily fully invested, but at least they can be if they want to. Moreover, we only evaluated NFOs from leading fund houses (by net assets).

It will be apparent from the table (below) that many of these NFOs didn't really need to be launched. In many cases the themes (infrastructure, commodities, outsourcing to name a few) failed to add any significant value to the investor's portfolio.

In quite a few cases, it is evident that the fund house had another fund with a relatively similar investment style/positioning. It could have been much simpler if the fund house chose to talk about the existing fund, rather than launch another NFO.

It is apparent given the quality of NFOs, why Personalfn was not enthused enough into recommending them to clients. Of the NFOs listed above only two caught our attention viz. Franklin Smaller Companies (a 5-year close-ended equity fund investing in small caps) and HDFC Long Term Equity (a 5-year close-ended equity fund investing in companies across market capitalisations).

Being launched by well-managed fund houses, with a lock-in allowing the fund manager to invest for the long-term in opportunities that were being ignored by most fund houses (like small caps for instance) were some of the compelling reasons for recommending such NFOs.

In addition to the NFOs selectively mentioned in the table, there are scores of NFOs that have added little value to the investor.

If anything, they have added to the confusion, because the thought uppermost on the investor's mind is -- NFO A is so similar to Fund B from the same fund house, what value will NFO A offer that is not already being offered by Fund B?

And it is apparent from looking at the NFOs that most haven't achieved the level of performance that was expected of them. As we mentioned earlier, many were too niche to outperform a broad-based index like the BSE Sensex. So investors are left wondering if they weren't better off investing in the index (i.e. an index fund) or a well-diversified equity fund. Of course, 1-year is an abbreviated time frame for evaluating an equity fund (we prefer a minimum 3-year time frame for this), but at Personalfn we have noticed that most thematic funds underperform the index over longer time frames.

With regards to NFOs, we have a clear action plan for investors -- avoid NFOs, instead opt for well-managed, existing funds from that category (of the NFO) with well-established track records over the long-term, especially during a market downturn.

However, if the NFO offers something that no existing fund in the industry does, then there is a case for considering it for investment. Or if an NFO from a well-managed, process-driven fund house, is open for a limited time period over which it will collect monies only upto a pre-determined ceiling (like DSP ML Micro Cap Fund), then again there is a case for evaluating it as a probable investment.

Barring these exceptions, we are of the view that an NFO must establish a track record over the long-term (at least 3 years for an equity-oriented fund) before meriting inclusion in the investor's portfolio.

By Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. Personalfn.com also publishes a free-to-download financial planning guide, Money Simplified. To get a copy of the latest issue -- Real Estate & You - please click here.