Pros and Cons of Investing in New Mutual Fund Schemes Like Reliance Nippon
The decision to invest in a new mutual fund scheme, such as Reliance Nippon, can be influenced by various factors, including the pros and cons associated with such investments. This article explores these aspects by examining the advantages and challenges of investing in new mutual fund offerings (NFOs).
Introduction to Index Funds and New Fund Offers (NFOs)
Index funds have become increasingly popular among individual investors due to their low cost structure and higher returns compared to fixed income instruments. These funds provide exposure to a wide range of companies through an index, thereby diversifying the risk and reducing the potential for significant losses in individual stocks.
Over the past year, fund houses have launched over 30 new index fund schemes, with many more in the pipeline. According to data from the Association of Mutual Funds in India (AMFI), index funds reported net inflows of Rs 4,914 crore in January, marking the highest ever inflows. The total assets under management (AUM) for index funds stood at Rs 49,905 crore, representing a three-fold increase compared to the same period last year.
Pros of Investing in New Mutual Fund Schemes
Smaller Fund Size
One of the benefits of investing in a new mutual fund scheme is the smaller fund size. A smaller fund can be more easily managed, potentially allowing for higher returns as the fund can invest in lesser liquid stocks.
Launch Based on Themes
Often, new fund schemes are launched on the basis of specific themes or strategies. While this can offer opportunities, it can also be a double-edged sword. For instance, the recent launch by Motilal Oswal Asset Management Company of the Motilal Oswal SP BSE Low Volatility ETF and Index Fund is a low volatility strategy that focuses on stocks with higher stability in price movements. However, the timing of the launch can be critical, as it may occur during a bullish market phase.
Cons of Investing in New Mutual Fund Schemes
Higher Expense Ratios
Another downside of investing in a new mutual fund scheme is the higher expense ratios. SEBI mandates expense ratio caps, and new funds may start with higher ratios until they reach a certain AUM threshold, typically 5,000 crore.
Timing and Market Conditions
Most new fund offers (NFOs) are launched during bullish market phases when stocks have already seen good rallies. Investing at these higher levels may result in poorer returns if the market experiences a downturn.
Relying on Fund Manager's Experience
The success of a new mutual fund scheme is heavily dependent on the fund manager's and team's past experiences. While it's important to invest based on a proven track record, research and due diligence are crucial to ensuring that the fund manager has a solid history of successful performance.
Conclusion
In conclusion, while investing in new mutual fund schemes like Reliance Nippon can offer potential advantages, it is essential to consider all the pros and cons. Smaller fund sizes and theme-based launches can be beneficial, but higher expense ratios and the timing of the investment are critical factors to consider. It is wise to conduct comprehensive research and choose funds with a strong track record to maximize the potential for successful investment outcomes.