Have a query regarding mutual funds? Maybe we can help.

Drop us a line and our mutual fund experts, Value Research, will do the needful.

You keep recommending that it's better to invest in older funds than in new untested ones.

But my understanding of how most organisations work suggests that the best fund managers who have the most successful track records will be in-charge of the biggest and the most prestigious funds.

And most fund houses have garnered huge amounts of money in New Fund Offerings. Which are also being managed by the same fund managers.

Would their focus not be more on these new funds where there is a lot at stake than on smaller funds which are one tenth the size?

My guess is that three years from now, today's NFOs would have substantially outperformed the older ones.

Please comment.

- Paul Menacherry

We do not say that every new fund is bad and that they are likely to under-perform.

Our point of view is that it is always better to bet upon something about which you have at least some amount of information. In this regard, new funds are at a disadvantage.

While you know nothing about new funds, at least you have some parameters about the old funds to base your decision upon (current investments, performance over time, how the fund has fared in a bull and bear run, and how the fund compares with its peers).

Moreover, even the economics are likely to be unfavourable for the new funds. Many of the new funds charge initial issue expenses (expenses on launching and marketing the new scheme) which are amortised (distributed over the years) and charged bit by bit over the next few years.

We have witnessed in the last one year that the asset size of a majority of the new funds have declined after their launch. This means that a lot of investor invest in the funds and in no time sell thier units. This also means that the burden of the initial issue expenses on the remaining and new investors will only get magnified. Therefore, new funds are likely to be more expensive.

Another aspect to look into is that a large size could work against the fund, as it could be quite a challenge to deploy the huge corpus in the investment worthy stocks (it could adversely affect the stock price if the stock was not liquid). Therefore, a large-sized fund might actually be starting with a disadvantage.

Obviously, the resources in a fund house are shared. But it would be harsh to say that the focus would be on the newer and bigger funds while ignoring the older ones. Remember, for a fund house to claim to be successful, a robust performance record of its older funds is necessary.

Got a question for Value Research? Please write to us!

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, rediff.com or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Illustration: Dominic Xavier