Why not invest in NFOs if past performance is no guarantee of future returns?

It is important to pay heed to the mutual fund disclaimer, "past performance is no guarantee of future returns". Then why not invest in mutual fund NFOs (new fund offers)? A discussion.

Published: March 4, 2020 at 10:26 am

Last Updated on December 29, 2021

Among all newbie questions on mutual funds, this is one of the most logical questions enough to stump any expert: Since mutual fund carry a past performance disclaimer – past returns are not indicative future returns – why can’t I invest in a mutual fund NFO?. The reason this is asked is, you would find many articles and many “experts” suggesting, “never buy NFOs!”

Everything we know about a mutual fund is based on past performance. From a simple NAV to returns, to one of these greek risk-adjusted measures, alpha, beta, etc. to the style of a fund manager, nature of the portfolio, PE, PB, everything is a data point in the past.

Of course, past decisions will impact the future. However, we do not know how and we cannot know. No matter how great the track record of a fund, no matter how consistent, mutual fund investing (like other personal finance purchases) is a leap of faith.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    We are always learning new things about the market and market risk. A couple of years ago, no could have imagined an equal-weight index (Nifty 100 EW or Nifty 50 EW) to deviate so much from their parents Nifty/Nifty 100 because just a few stocks were responsible for the movement of the Sensex/Nifty. See: Return difference of Nifty 50 vs Nifty 50 Equal-weight index at all-time high!

    We constantly see examples of past performance not meaning anything: Ten year Nifty SIP returns have reduced by almost 50%, and Franklin India Bluechip Fund has not beaten the Nifty for the last 11 years! and Misconceptions about the Nifty PE

    Or how the definition of a “high PE” has constantly changed, how the Sensex was not overvalued when it crashed in 2008 (by its own PE track record).  From: Is the Market Overvalued?
    Moving Average of Nifty PE Nov 2019

    We are continuously seeing past star performers in the MF spaces relegated to average or below-average slots (eg. DSP 100, HDFC 100, HDFC Equity, HDFC Taxsaver etc).

    A look at the rolling returns graph of any index or mutual fund would tell you expecting returns from mutual funds is a mistake.

    Yes, mutual fund investing is a leap of faith. Thankfully, unlike life insurance where our nominees would find out if we got the right policy or not, unlike health insurance where we come to understand ground realities only when we claim and as the company gets more claims and from where an exit is difficult, mutual funds are easy to exit.

    If you do not like a fund’s performance you can exit at any time. Most investors fearing taxes, leave existing units as is “just in case” and buy a new fund. After a few years, they have more funds than their net XIRR number.

    Since anyway past performance is of little relevance to the future, since buying mutual funds boils down to potluck, there is no harm in buying mutual fund NFOs.

    However (there is always a however!), an NFO purchase makes sense only if it holds a unique place in your portfolio. Only if you can measure the impact of that fund on your portfolio.

    If you already hold ten funds, then just about any NFO would amount to buying more of the same stocks you hold. In this case, an NFO purchase does not make sense.

    If you get enticed by a bank RM exaggerated statements about a NFO, then it is a mistake. If you think purchasing NFOs will get cheaper units (at Rs. 10) and therefore more returns, it is a mistake.

    The reason NFOs should be avoided is because most people have no need for them. Most of these have nothing unique/different from what is already available (often at lower expenses) and investors would already have them.

    There is however no logic to the advice, “avoid NFOs because they have no track record, prefer a fund with a good track record”. No logic because it would mean we are ignoring the past performance disclaimer!

    Only new investors would have the necessary logical space in their portfolios to accommodate an NFO. They would probably lack the necessary guts. Experienced investors must summon up enough courage to discard past performance and expect market movements with an open, but a prepared mind. We could sleep better when we remove expectations from factors we cannot control.


    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
      Buy the book: Chinchu gets a superpower for your child!
      How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
      Connect with us on social media
      Our publications

      You Can Be Rich Too with Goal-Based Investing

      You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)