With a record-breaking 231 new fund offers (NFOs) in 2024, raising over ₹1 lakh crore, passive investing is taking centre stage. Are fund houses riding the wave responsibly, or are investors getting caught in the hype? Rahul Bhutoria, Director and Co-Founder of Valtrust, in an interview with Fortune India, decodes the NFO frenzy, the dominance of sectoral and thematic funds, and the pitfalls investors must avoid.
Edited Excerpt:
Q: 2024 had a record number of NFOs even crossing 200 marks. Passive space seems to offer unlimited scope for launching new funds. Is this one way for fund houses to ride on the popularity of passive funds and capture market share?
A: In 2024, there were around 231 new schemes in the market, which raised over ₹1 lakh crore. This was a record year for mutual fund launches. Of these, 76 were index funds, showcasing the growing trend of passive investing. Fund houses are indeed leveraging this popularity to expand their offerings. Launching an index fund or ETF is simpler as it mirrors the underlying index, reducing dependence on fund managers.
Passive funds align with themes and trends, allowing fund houses to tap into specific market opportunities efficiently. Moreover, these funds meet investor demand for cost-effective, automated portfolio management. Thematic and sectoral funds were the most popular choice for investors. Themes like India opportunity, manufacturing, and digital were in high demand.
Q: Despite NFOs lacking performance track record why do investors succumb to hard selling tactics?
A: NFOs are frequently marketed as offering innovative strategies or tapping into emerging trends, creating excitement about being part of a “new opportunity.” Many investors mistakenly believe that buying into an NFO at its initial Net Asset Value (NAV) of ₹10 is a bargain compared to existing funds, ignoring that NAV is irrelevant in assessing a fund’s value or potential returns.
Investors often rely on the recent success of a sector to guide their decisions, assuming that past trends will continue indefinitely. This bias blinds investors to the inherent risks, particularly in sectoral or thematic NFOs, leading them to focus only on potential gains while ignoring the possibility of underperformance.
Moreover, investors also feel that they can time their entry and exit into the sector. Of the Sectoral/Thematic Funds whose data is available, about 60% of the funds have underperformed the Nifty 50.
