What are the pros and cons of the NFO HDFC Manufacturing Fund?

Ans: Thanks Shakir, everything great with us. Hope the very same with you and your family.

All NFOs will offer you only a bulk subscription facility. Typically, NFOs close in a few days and then open within a week or so and then you can set-up a SIP the way you would for any fund in a normal manner.

If you do wish to subscribe to this particular NFO (HDFC Defence Fund) only through a SIP, let’s say of Rs 5000, then you have two options:-
1. Minimum subscription amount is Rs 5000. Invest Rs 5000 in the NFO. When you get the allotment, you would also get your folio number along with it. Set up your SIP in it for Rs 5000.

2. Do not do anything during the NFO. When the NFO closes and the fund opens for regular subscription (which will be within 5 business days of NFO closing, as per the scheme documents), set up the SIP as you desire.

Above notwithstanding, I will request everybody to not confuse between an IPO of a stock (share) and NFO of a mutual fund scheme. The two are intrinsically entirely different. A NFO has just no track record and you could be investing in a new born baby hoping that he will be Amitabh Bacchan when he grows up!

We advise our clients never to invest in any NFO.

Ans: We believe investing in both comes with risk and therefore, investors must know the risks involved before plunging. However, for funds having known history, process and performance it is easier to make the decision. At the same time, if an NFO comes with a new idea or fills gap in the portfolio, investors can give it a try.

Ans: It's great to see your interest in exploring investment opportunities, but it's important to carefully evaluate your options, especially with thematic funds like HDFC Manufacturing NFO. Here's some advice to consider:

Thematic funds like HDFC Manufacturing NFO focus on specific sectors or themes, in this case, the manufacturing sector. While these funds can offer potential for high returns during favorable market conditions, they also come with higher risks and volatility due to their concentrated exposure. Here are some key points to consider:

Risk and Volatility: Thematic funds are inherently riskier than diversified equity funds because they invest in a specific sector or theme. Any adverse developments or changes in the sector's fundamentals can significantly impact the fund's performance.
Cyclical Nature: Sectoral funds are often cyclical, meaning their performance is closely tied to the economic cycles and business cycles of the specific sector they invest in. This can lead to periods of outperformance followed by periods of underperformance.
Lack of Diversification: Thematic funds lack diversification as they focus on a specific sector or theme. Diversification is crucial for reducing risk and minimizing the impact of adverse events in any particular sector.
Long-Term Considerations: While thematic funds can offer short-term gains during favorable market conditions, they may not be suitable for long-term wealth creation. Diversified equity funds, on the other hand, provide broader exposure to multiple sectors and companies, reducing concentration risk.
Considering these factors, it's important to assess whether the potential benefits of investing in HDFC Manufacturing NFO outweigh the risks, especially given your investment horizon of 5 years plus. Instead of concentrating your investments in a single thematic fund, you may consider diversifying your portfolio by investing in a mix of diversified equity funds across different market segments. This approach can help spread risk and potentially offer more stable returns over the long term.

As for investing an additional 3 lakhs in HDFC Manufacturing NFO, it's advisable to first evaluate your overall asset allocation, risk tolerance, and investment goals before making any further commitments. Consulting with a Certified Financial Planner can provide personalized guidance tailored to your financial objectives and help you make informed investment decisions.

Ans: Your interest in investing in the HDFC Manufacturing Fund New Fund Offer (NFO) is commendable. It’s crucial to evaluate such investments carefully, especially when considering sectoral funds and NFOs. Let’s explore the potential downsides of NFOs and sectoral funds and understand why you might want to consider other options.

Firstly, your proactive approach to increasing your investment amount annually by 10% to 15% is excellent. This strategy reflects a commitment to growing your wealth systematically.

Understanding NFOs
Lack of Performance History
One of the primary disadvantages of investing in NFOs is the lack of a performance track record. Unlike established funds, NFOs do not have historical data to demonstrate how they perform across different market cycles. This makes it challenging to gauge their potential for future returns.

Marketing Hype
NFOs are often heavily marketed, creating a sense of urgency and excitement. However, this hype can overshadow the fund’s actual investment strategy and potential risks. Investors might get swayed by marketing campaigns without fully understanding the implications of their investment.

Initial Costs
NFOs sometimes come with initial costs, such as entry loads, which can eat into your returns. Established funds often have lower expense ratios and no entry loads, making them more cost-effective in the long run.

Disadvantages of Sectoral Funds
High Risk and Volatility
Sectoral funds, like the HDFC Manufacturing Fund, focus on a specific industry. This concentration can lead to high risk and volatility. If the manufacturing sector faces a downturn, your entire investment could be adversely affected. Diversification is limited, increasing the impact of sector-specific risks.

Lack of Diversification
Sectoral funds do not offer the broad diversification found in multi-cap or flexi-cap funds. Investing heavily in one sector means your portfolio is not protected against risks in that particular sector. Diversified funds spread investments across various sectors, reducing overall risk.

Economic Cycles Impact
Sectoral funds are highly sensitive to economic cycles. The manufacturing sector, for example, can be significantly affected by economic downturns, changes in government policies, and global market conditions. This sensitivity can lead to unpredictable returns.

Evaluating Your Investment Strategy
Investment Horizon
Given your plan to invest for two years and then increase your investment annually, it’s essential to align your strategy with your financial goals and risk tolerance. Sectoral funds are generally more suitable for experienced investors with a higher risk appetite and a longer investment horizon.

Consider Diversified Funds
Instead of sectoral funds, consider investing in diversified equity funds. These funds spread your investment across various sectors and companies, providing better risk management and potentially more stable returns. Diversified funds can include large-cap, mid-cap, and small-cap stocks, offering a balanced approach.

Professional Guidance
Seek advice from a Certified Financial Planner (CFP) to ensure your investment strategy aligns with your long-term financial goals. A CFP can provide personalized recommendations based on your risk profile and investment objectives.

Conclusion
Investing in NFOs and sectoral funds comes with significant risks due to the lack of performance history, high volatility, and limited diversification. Instead, consider diversified equity funds for a more balanced and stable investment approach. Your proactive strategy of increasing investment annually is commendable, and with the right guidance, you can achieve your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in