Food and funds make strange bedfellows but one cannot but think about the former when one scans the latest list of NFOs (New Fund Offers), which the securities regulator regularly updates.

An eclectic feast seems to await the mutual fund investor, the one who is seeking new-age alternatives to old-fashioned fuddy-duddies. Laid neatly on the table is a multi-course smorgasbord — a thaali comprising international funds, thematic funds and even exchange-traded funds based on indices that only the discerning few would be familiar with.

So while you may nibble at an India-Taiwan equity proposal, and make a morsel of a Nasdaq 100 index idea, you may also relish a low-volatility investment theme, not to mention ETFs (exchange traded funds) that would mirror consumption and FMCG indices. Indeed, rarely was the asset management space in India so crowded in terms of sheer diversity of fresh propositions.

The very nature of some of the NFOs proposed lately present investors with a stiff challenge — how would they exercise choice? Which among these really merit their attention? And why should they reject the others?

Before I get to discuss these issues, let me quickly tell you that NFOs such as these reflect a definite willingness on the part of our fund houses to offer a greater variety of choices to the local investor fraternity.

While this is especially true for equity (where variegation of proposals is quite easily achieved), the debt space is currently witnessing similar trends too. The days of only traditional and old-style products for the two most critical asset classes are truly over, it seems.

Certain significant developments in the securities markets — many of these have already emerged as major international themes — have helped intensify the trend in India. For instance, ESG (environment, social and governance) is now an important force to reckon with globally; Indian fund houses have already started to adopt it.

Sustainable investing, including themes focused on protection of climate or reduction of carbon footprint, is the other emerging space for our asset managers. Already, one of them has lined up a fund revolving around water. I do not wish to name specific fund houses here; let readers find out more if they wish.

Investors’ checklist

It is clear to me that a cascade of spiffy NFOs may well leave the average participant quite flummoxed. If you are keen on allocating to any of the new proposals, make sure that you address a few vital issues right at the beginning. This, it is time for you to consider the following:

• Do your risk-return limitations allow the inclusion of an altogether fresh option?

• Is the idea in line with your existing investment objectives? Will it be in sync with your current asset allocation? Or do you need to tweak your strategy significantly just to accommodate it?

• How will the proposal add value to the portfolio you have at this juncture? What sort of securities is the new fund likely to acquire? Are you sure it is effectively not a me-too product in disguise?

Remember, a completely novel proposition (especially if it is based on an exotic theme) may be a drag on your portfolio, at least in the initial phase, as the fund manager has to fully appreciate its rationale. So think about it in terms of longer-than-usual gestation period too. At any rate, he will need time to fully invest the amount mobilised from the new-offer market.

Notions like climate protection and carbon reduction (both are bound to achieve great traction in the days to come) are very complex.

Businesses that are getting generated worldwide (especially in emerging markets like ours) on the basis of these notions will not be easily comprehended by ordinary investors. The point is, there is need for greater vigilance with regard to NFOs, and only a careful investor will be able to understand their finer nuances. Simply put, he is well advised to carefully read the document in order to know an NFO’s true worth.

Understand the risks

Take the recent case of an ETF that has been worked out for the FANG market in the US. The fund will invest in stocks constituting the NYSE FANG+ index. The Facebook-Amazon-Netflix-Google (includes Apple too) combine has its own set of merits, and the fund manager concerned is leveraging on the same for his Indian clients. The fact that a popular “FANG index” already exists overseas makes it easier for the domestic fund.

Not all NFOs will make wonderful additions to an investor’s existing holdings. Their core risks (which may potentially result in gross underperformance) must be understood by him. Further, he must also be aware of the fact that a number of systemic elements will be at play, particularly if the NFO is based on an international concept. Global dynamics can be very different from ours, and while many popular index funds/ETFs will mirror international trends, there will always be tracking errors as well as sundry costs and expenses.

Also, foreign exchange movements will certainly be an influential factor for the markets, and no investor can afford to ignore these. Regulatory risks too are a constant threat for many smart investment ideas — ordinary investors are often too ignorant about these perils.

The writer is director of Wishlist Capital Advisors