The retail investor's fascination for something "new" in his portfolio is a phenomenon which has repeatedly confounded us. In fact, the most often-repeated request from investors tends to be for a new fund.

So what makes the idea of investing in a new fund tick and does it make sense to do so? Let's find out.

Firstly, investors seem to have developed an insatiable appetite for new fund offers (NFOs). The huge asset sizes amassed by some of the NFOs bear testimony to the same. Simply put, an NFO is a new fund launched by an asset management company (AMC).

And investors are given the opportunity to invest therein at a price (termed as net asset value or NAV) of Rs 10 during the NFO stage. This is the clincher! The Rs 10 NAV is often perceived as a cheaper buy vis-�-vis existing funds with higher NAVs. Most investors make the mistake of confusing a mutual fund NFO with a stock IPO (initial public offering).

In a stock, the book value (its intrinsic worth) and market value (determined by market factors) are divorced from one another. Hence, a stock with a market value lower than the book value would be termed as an attractive buy.

Conversely, in a mutual fund, the book value and market value are the same and are represented by the NAV. Simply put, the NAV is computed by reducing the fund's expenses from the total assets and then dividing the result (this figure is called "net assets") by the number of units held.

Hence in a mutual fund, the NAV represents the assets backed by each unit. Effectively the Rs 10 NAV offered by a fund in the NFO stage is not cheaper than an existing fund with an NAV of say Rs 100.

However, this seemingly simple rationale is often lost on investors. Unscrupulous investment advisors and mutual fund distributors should be "credited" for the same. Investors are convinced to participate in every NFO which hits the markets, on the grounds that it is an opportunity to buy at a lower price.

Fortunately, for investors, the incessant NFO launches caught the regulator i.e. Securities and Exchange Board of India's eye. Sebi issued guidelines that made the launch of open-ended NFOs rather unattractive for AMCs and distributors alike.

Apart from NFOs, the urge to hold something new also surfaces, when an investor wants to invest in a fund that is distinct from the existing ones in his portfolio. Again the driving factor isn't what the new fund can add to the portfolio i.e. its potential utility; instead it's the "newness" of the fund.

An ideal portfolio is one which is comprised of funds/investment avenues that match the investor's risk profile and work towards achieving his predetermined objectives.

The performance of the funds (and thereby the portfolio) should be monitored regularly. If any fund fails to deliver the results expected from it, corrective steps need to be taken. The same could involve exiting the fund or reducing the allocation made to it.

Conversely, in a situation wherein the funds are performing in an expected manner, there is no need to consider another fund while making fresh investments.

Additions can be made to the existing holdings. Sure, diversification is important, but then we are assuming that the portfolio is already a well-diversified one.

A portfolio with an unduly large number of funds stands the risk of becoming an untenable one. Monitoring and managing a portfolio which is fragmented can prove to be a cumbersome and time-consuming task.

Furthermore, by investing in a new fund, instead of the existing ones, the investor forgoes the opportunity to invest in funds with proven track records and performance. And that may not be a smart move.

We aren't suggesting that investors should necessarily refrain from investing in NFOs or funds distinct from the ones presently held by them. However, the reason for doing should be the value-add they can bring to the portfolio.

The NFO/new fund should have an offering that is distinct from the existing funds and the same should also contribute towards making the portfolio a more comprehensive one. A Rs 10 NAV or the fact that the fund is distinct from your current investments don't qualify as good enough reasons for investing in a fund.

For a Free download of the latest issue of 'Money Simplified -- The definitive guide to planning for your child's future,' click here!