NFOs are available at NAV of 10 while existing funds have high NAV. Should I buy NFOs then?Asked
NFO or New Fund Offer is the first time subscription offer to the investors launched by the mutual fund companies. It is launched in the market to raise capital from public before it opens up to the daily transactions and in this aspect it is similar to the IPO (Initial Public Offering).
The mutual fund companies invest the capital raised from NFOs in stocks, bonds, commodity, etc. NFO comes with a prospectus and within it contained all the information about the fund - what are the securities fund is planning to invest, what are the expected returns it will be providing to the investors and the rationale behind the launch of the fund.
Few years ago, when stocks IPO were offered at discount to the people who people considered the fair value of the stock and once they are established on the secondary market, they are traded at premium price. This created an excited among investors and same applies in case of mutual funds’ NFO. NFOs are marketed aggressively by the mutual fund companies to attract the investors.
Should I invest NFOs or existing funds?
Whether one should invest in NFOs depends on a number of factors such as the value proposition offered by the NFO, risk taking ability of investor, fund house, etc. Their point of difference from the existing fund is that existing funds have a track record to show for whereas NFOs are absolutely new into the market. Hence, investing in NFOs always accompanies higher risk.
10 Rs. NAV :
NFOs are offered at the absolute price (Rs. 10 mostly) and investors can pool in their money for a stipulated time only. However, the investing decision should not be based on Rs.10 offering, other factors should be given importance. After the NFO period is over, the fund units are offered at the current NAV price only.
When you are choosing a mutual fund whether it is NFO or existing fund, it is important how it fits in your portfolio. The other factors that should be considered are fund manager’s track record, performance of the fund, etc. However, existing mutual funds are always considered better and safer than New Fund Offers or NFO because the performance of the existing funds can be traced to the previous times and the risks and returns can be evaluated.