Investors are just seen a wave of latest fund offers (NFOs). Now, there’s a rush for open-end fund licenses, evident from many new firms entering the fray recently. Fintechs, PMS firms, distributors and even discount broking firms have applied are looking to become open-end fund houses.

While it’s advisable to travel with existing schemes that have an extended track-record, new fund houses may come up with innovative products or investment processes in selecting stocks, which deserve some consideration.

Here are a couple of things to stay in mind if you opt to travel with a scheme from a replacement fund house.

Does the management have a track record?

Check whether a fund home is travel by a team of investment professionals who have experience in managing assets.

For example, White Oak’s open-end fund foray is led by its founder Prashant Khemka. He was the chief investment officer at Goldman Sachs Asset Management (GSAM) and spent 17 years there. Aashish Somaiyaa, who are going to be the chief military officer of this new fund house, has been within the open-end fund industry for 21 years.

Index or exchange-traded funds (ETF) seem to be the new flavor with some newbies beginning with them. And to entice investors, newer fund houses may even lower costs drastically. as an example , the Navi Nifty 50 mutual fund that was unrolled in June 2021 remains the most cost effective mutual fund within the industry. Passive schemes mimic indices and don’t carry fund manager risk, though the tracking error may have to be gauged over time.

Swarup Mohanty, chief military officer of Mirae MF, says that several of the new fund houses could follow a totally different business plan, which might allow them not only to compete, but even challenge large and established fund houses.

Is there a well-defined investment process?

Fund houses with strong investment processes manage to try to to well and build an honest long-term diary . How does an investment process help? There are often instances where a fund manager’s own bias towards a specific stock or sector can hamper the performance of the scheme. But, if there are strong processes in situ , it can help in bringing down the impact on the scheme’s performance.

“A strong investment process also can help the fund house to stay its performance intact despite fund manager exits,” says Amol Joshi, founding father of Plan Rupee Investment Services.

Recently, the newly-launched fund house Samco MF disclosed its investment process. The fund house will use what it calls the Hexashield Framework to spot investment ideas. So, each company would get tested on six parameters. These are reinvestment and growth stress tests, corporate governance and leadership stress tests, income assay , balance-sheet and debt assay , competitiveness and pricing power stress tests and regulatory stress tests.

Joshi adds that it’s also important for investors to watch whether the fund home is sticking to its investment philosophy or deviating from it. Again, this gets validated over time, regardless of how elaborate a replacement fund home is about its process at the time of launch. Especially, if it actively manages its funds.

Some of the new fund houses could even deviate from traditional investment processes and are available up with their own ones.

For example, NJ open-end fund will use a mixture of predefined rules or factors to pick investment ideas, without a fund manager stepping into the image .

“Rule-based investing has been successful globally. Now, there’s enough data in Indian markets to analyse and apply rule-based investing here. So, through this new way of investing, investors can diversify their investment portfolio,” says Rajiv Shastri, chief military officer of NJ MF.

“We aren’t new managing assets. we’ve been running our PMS services for the last 11 years, offering both rule-based and factor-based products,” he adds.

Be cautious about new investment themes

Sometimes, new fund houses launch innovative schemes. Financial planners typically avoid such schemes and instead point towards existing funds that accompany proven records.

“These new funds are often linked to an emerging investment theme, a replacement sector or asset class. But, unless such funds sit within the investors’ risk-profile, return expectations, or offer genuine diversification, investors should avoid such schemes,” says Anup Bhaiya, founder and director of cash Honey Financial Services.