Mutual funds are allowed to start only one active fund in each category. So to increase the assets managed by fund houses, new passive funds are launched with different variants. “You can start an NFO with several variants, many fund houses are launching NFOs. The market has shown resilience and therefore this is definitely a good time to increase the assets under management. However, investors should be careful to only choose NFOs that are unique and need in portfolio. Unlike direct stocks, just because they are available at Rs 10, doesn’t mean they are cheap. There is no track record of going forward with these NFOs,” said Rajesh Minocha, Certified Financial Planner (CFP) and founder of Financial Radiance.
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Tata Mutual Fund has launched as many as 11 passive funds in 2024, followed by Motilal Oswal Mutual Fund which launched six passive funds in the same period. Around four fund houses launched five passive schemes each. SBI Mutual Fund, the largest fund house based on assets under management, launched three passive funds during that period.
Some of the passive funds that are gaining investor interest are Motilal Oswal Nifty India Defense Index Fund, Aditya Birla SL Nifty India Defense Index Fund, Kotak BSE PSU Index Fund mainly due to the performance of these sectors.With fund houses coming up with new passive funds, should investors invest in these funds at this time?
“Investors can choose passive funds with large caps, because most active funds in this category cannot justify the higher expense ratio. As India continues to develop and more information about stocks is readily available (as in the West), it may be difficult for active funds generate alpha. However, in the mid-cap, small-cap, flexi cap etc. categories, there is still good alpha to be generated,” Minocha said.
He also added, “We can have good asset allocation from mutual funds with the help of personal finance professionals who do thorough research before recommending the funds.”
About five categories of mutual funds have launched more than 10 passive funds. Among these five categories, thematic and sectoral funds are also making their presence felt. In 2024 so far, 22 thematic funds and 13 sectoral funds have been launched.
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Four fund houses – Bandhan Mutual Fund, Motilal Oswal Mutual Fund, SBI Mutual Fund, and WhiteOak Capital Mutual Fund – have launched three sectoral/thematic funds. The main sectors or themes based on which funds are launched are business cycles, manufacturing, healthcare, technology, consumption, innovation, special opportunities, energy opportunities, and banking and financial services.
Of these sectors or themes, which should investors choose? What is the right time to make these fund allocations?
“Sector funds can be very risky, because they are concentrated in certain sectors and if they are not good, the fund manager cannot perform. Redemption pressure further increases the position. Thematic funds can still be good because the investment philosophy is to invest in specific themes, not specific sectors . The risk is always very high in this category and investors should make a decision only based on their risk appetite, goals and time frame. Lumpsum investments in these funds should also be avoided especially if the time frame is only a few years,” said Minocha.
One should always consider risk appetite, investment horizon, and goals before making an investment decision.
(Disclaimer: Recommendations, suggestions, ideas and opinions expressed by experts are their own. This does not represent the views of The Economic Times)
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