NFOs: Need for simplification

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Diversification is the primary objective of mutual fund investing. However, this thumb rule may not hold true if investors fail to establish a delicate balance in diversification, especially today when investors struggle to choose the proper scheme from an overwhelming number of available funds. The number of new fund offerings (NFOs) are also on the rise with those this year exceeding those of last year. About 140 NFOs were issued this calendar year till October, compared to approximately 110 NFOs between January and December last year.

Although Sebi and the Association of Mutual Funds in India (AMFI) have adopted different categorisation and scheme rationalisation measures in recent years, with so many schemes debuting this year, selecting a scheme remains a daunting task for the average investor.

According to AMFI data, as of September 2021, just 26% of assets were held by individual investors from beyond the top 30 cities (B30), while the top 30 cities (T30) held as much as 74%. T30 denotes India’s top 30 geographical locations, whereas B30 denotes locations outside the top 30. This means that locations outside the top 30 still have a long way to go when it comes to mutual fund investing. This is only achievable with increased mutual fund awareness but also with the need for scheme simplification. A typical error made by investors is over-diversification. Having too many options to choose from can be very confusing. A significant disadvantage of excessive diversification is the difficulty of keeping track of all the funds regularly.

This is not to suggest, however, that diversification is unnecessary. If there is insufficient or no diversification, the risks dogging the investor will automatically increase. As a result, investors should ensure that their investment portfolios are appropriately balanced. For regulators, there is a need to streamline the process of too many complicated schemes, especially when there is a massive growth in NFOs.