Should you use an NFO for tactical allocation? Mrin Agarwal answers

" Essentially, business cycle funds have been again around for more than 10 years. There are a limited number of funds in this space. So, typically what these funds try to do is try to look at different business cycles and try to catch the cycle at the beginning of the cycle and try to do allocations based upon how they see the business cycle basically playing out," says Mrin Agarwal, Founder & Director, Finsafe.

We have a few NFOs that been launched recently, but very interesting ones. Before I get into the do's and don'ts and the criteria based on which you should be deciding to invest in NFO or not, let us talk about the new launches. I want to start with HDFC Defence Fund which sounds very unique and very different in terms of being a sector or a thematic fund. How would you explain what is the structure of this fund?
Well, this is a fund that invests in defence and allied sectors basically. From what I saw in the presentation, it is a small subset of stocks and mainly PSU oriented stocks basically, so it is extremely high-risk sectoral fund that is riding upon the theme of defence spending, Atmanirbhar Bharat and the big focus that is there on defence in India, so that is what the fund is all about.


But then going ahead, the second name on the list is BNP Value Fund.
It is a fund that basically looks at the value style of investing, looks at funds, at stocks which are undervalued at this point in time and which could have a growth potential in the future. So just like many other value funds, this is another offering in that space.

Next is a Business Cycle Fund from Quant AMC, now that is the NFO that people are really excited about and especially the kind of return Quant’s Fund have given in the past, being a small AMC, few of categories have been really hit in investors. What about Quant Business Cycle Fund?
Essentially, business cycle funds have been again around for more than 10 years. There are a limited number of funds in this space. So, typically what these funds try to do is try to look at different business cycles and try to catch the cycle at the beginning of the cycle and try to do allocations based upon how they see the business cycle basically playing out.

What I find in these funds is that the business cycle funds, if you look at the existing funds that are there, have not had that great a performance or let me say outperformance over a simple Nifty 50 and these funds tend to also be having very high expense ratios compared to more broad-based funds and again the fact remains that any fund today would be looking at a business cycle before making the next bet.

So, I do not really find anything so unique about any of these funds that we have actually listed down. I mean, if you look at the value category, that also already exists. Of course, the defence fund is something that is different and for people who do have an idea about the sector and want to take a concentrated exposure, it is a good bet.

UTI Housing Index Fund, now that sounds something new.
Yes, that sounds something new, again going on the whole housing space basically. But honestly, the issue with all of these funds, except for the Nifty 50 Equal Weighted Fund, all of these funds tend to be thematic or sectoral in nature.

How do you get a sector understanding and what should be that stage when you should be investing in an NFO which is so concentrated?
Firstly, I agree with you that these are all tactical allocation funds. These are not your core allocation funds and with tactical allocation now you could keep aside an amount, let us say 10% to 15% of your equity portfolio. But then you need to be very clear about where you want to tactically allocate this. I mean, what are the sort of sectors or what are the sort of themes.

The other thing with a lot of tactical allocation is that while we always tell people not to time the markets, this is something in which you do need to have a clear strategy for entry and exit. Now, I also find that a lot of NFOs actually come when there has been a significant run up in the stocks as well.

So, people who are investing into this need to be mindful of that fact as well and we have seen a good run up in PSU stocks, so people need to be mindful of the fact that they are entering after there has already been a good amount of run up and with any NFO, as you said, there is no track record.

You do not know if the theme is really going to play out. Look at the whole pharmaceutical theme or the healthcare theme which was so big in 2020 but 2021, 2022 healthcare stocks have been right at the bottom. So, the main thing is that if you are planning to do a tactical allocation, you need to be very clear about what sector you want to do it in and it has to tie-in with your risk profile and your investment strategy.

A lot of investors get into it thinking it is something different, something new, let us just try it out. I do not think that you can have that sort of a stance to say let us just try it out because when you try it out, you are putting some small amount. It is really not even going to make a big difference even if it works out really well.

If one wants to have something where you can have a value strategy, there are already funds in the category which can be recommended and which can be looked at?
Yes, that is what I would say. I know that past performance may not be emulated in the future, but I would always go with a fund that already has a past track record that you can look at and that will be lower cost as well over trying to look at an NFO.

Now instead of having a tactical allocation, first of all, how important is a tactical allocation and even if we talk about tactical allocation, should an NFO be an option for that part of diversifying your portfolio?
I do not think that tactical allocation is absolutely necessary for everybody. In fact, it is mainly for advanced investors, suave investors who want to manage their portfolios actively they can look at a tactical allocation.
I mean, to be honest with you, for the majority of investors, I think their focus really needs to be on the core portfolio, looking at getting the core portfolio right before really looking at taking these sorts of bets.

So that is the question on the tactical allocation. And the second part being, do I use an NFO for tactical allocation? Well, if you understand this sector and you believe that this sector is going to have good performance and you have a good amount of knowledge in this particular sector and you want to take a concentrated bet, then I think it is fine to look at doing the NFO. But do not just do it because it is available at 10 rupees or because it is something new that has come out right now.