Why You Should Think Twice Before Buying NFO

Market Update - Tuesday, 25 Nov

It was another dull day in the market, continuing a dull start to the week. Yesterday we saw a dip, and today the market was also slightly down. The broader market remained stagnant, though the Nifty dipped a bit.

The Nifty was down for the third consecutive day, dropping by 0.29%. We are moving down on a leg, and this descent will end at some point. Perhaps we will go and clip an average, or maybe move up from here, but the movement is a gradual decline, not a sharp fall.

A tweet (from Alok Jain) shared this morning highlighted the Nifty Small Cap 250 index, which has now touched the same level three times before. Historically, when the index has reached this region of the 16,500-16,600 range, the market has been reasonably oversold. It is possible that the market will attempt to build up from this point if some positive tailwinds emerge. If not, we may consolidate here, and bad news could trigger a sharp breakdown, potentially a significant leg down.

• The Nifty Junior was completely flat, down 0.26% after three massive down days.

• Mid-caps were up 0.26%, and small-caps were up 0.11%, both showing no major up move but merely holding their ground.

• The Nifty Bank was also completely flat, down 0.03%.

• Gold moved up yesterday after India's equity market hours but has since flattened out.

• Silver was also slightly down by half a percent, with no major movement.

Other Market Triggers

• The Nifty heat map was primarily supported by State Bank of India, SBI Life, Shriram Finance, Bharat Electronics, Hindalco, and Dr. Reddy’s.

• Weak segments included Tata Motors, TCS, Infosys, HDFC Bank, ICICI Bank, Bajaj Finance, and Kotak Bank, all moving down.

• Additionally, the entire FMCG group, including Hindustan Unilever, ITC, and Nestle, moved down.

• In the Nifty Next 50 heat map, there were bigger gains in commodities, with Vedanta and Hindustan Zinc moving up, along with PSU Banks like Canara Bank, Bank of Baroda, and PNB, and some other finance companies such as Chola Finance and Bajaj Holding.

• Godrej Consumer Products and Britannia were also gainers in the FMCG space.

• Stocks that were moving down included Mazdock, Enrin, IOC, BPCL, LTIM, and Naukri, along with REC and Bajaj HFL.

• In the Mover of the Day segment, Orient Electric, a stock that had crashed from 200 to 150 a few days ago, suddenly shot up by 20%. This behavior is typical of low-liquidity, smaller-cap stocks.

U.S. Market Update

• In the US market segment, the S&P 500 showed a fantastic gain of 1.5%. The Dow was up by a lesser margin, while the NASDAQ was up by almost 2.6% to 2.7%, and the Russell index gained nearly 1.9%. These are fantastic gains for the US market after a tough time in the last week.

• Over the last month, the Russell is still down 4%, and the NASDAQ is down 1.4% and 1.2%, respectively, but the last day and last week are looking quite good.

• Broadcom was up 11%, Tesla gained 6.8%, and Alphabet and Advanced Micro Devices were some of the stocks racing hard in the previous US session. Some of these stocks could potentially be part of the Weekend Investing US stock strategy, but please note these are not recommendations, and the disclaimer applies.

What to watch next ?

• Currently, the market lacks any real trigger and is waiting for one, which has not yet materialized.

• Specifically, the market is anticipating the U.S.-India trade deal, and this waiting has led to some positions being pared and a feeling of impatience among investors.

• While Asian markets have bounced slightly, overall, there seems to be no escape from the current weakness. Interestingly, the US market appears to be diverging from Asia.

• US markets performed quite well yesterday with a very strong bounce, but this strength was not mirrored in the Asian markets, indicating a divergence in trends.

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The Investment Insider: NFOs – Opportunity or Sales Pitch?

💡 Understanding the NFO Terminology

The term NFO (New Fund Offering) was coined by the Mutual Fund industry, drawing a parallel to the IPO (Initial Public Offering) in the stock market. In an IPO, new shares are introduced to the secondary market.

• The common misconception: When people hear "New Fund Offering," they often assume it's an opportunity to buy something cheaply at "face value" that is bound to increase later—similar to an early-bird deal.

• The reality: This assumption is entirely false. Mutual Funds are bought and sold based on their NAV (Net Asset Value). When a new fund starts, it has no existing value or performance track record. It is merely a concept yet to be implemented.

🎯 The Marketing Angle: Scarcity and Urgency

NFOs are frequently marketed as a "Limited Time Opportunity."

The unfortunate truth is that many individuals prefer not to invest the time or effort to conduct their own analysis. They often rely entirely on the advice they receive, which leads them to invest in NFOs.

• The Distributor Incentive: A significant factor driving NFO sales is the higher commission earned by distributors upon selling a New Fund Offering. This creates a powerful incentive for advisors to push NFOs, irrespective of their potential performance.

📉 The Performance Reality: Data Doesn't Lie

The data from Value Research over the past decade presents a stark reality regarding NFO performance:

Key Learning: An NFO is not a guaranteed "cheap" entry point; it is an unproven product, often sold with high distribution incentives, and historical data suggests a high probability of underperformance.

"Investing in an NFO is like throwing money at an unknown outcome. Stick to the funds that have already proven their value."

Meme Of The Day