There are a lot of NFOs coming. Why should one invest in them? What are pros and cons of investing in an NFO?Asked
A New Fund Offer (NFO) refers to a situation when a new mutual fund is launched and offered to the public before it opens up for daily transactions. Its working is similar to that of an IPO in the sense that both are first open to public in order to raise capital before further operations.
Pros of NFO are:
Cons of NFO are:
One should invest in a NFO only if it offers something different from the existing funds or something which cannot be achieved with open ended funds.
Returns from mutual funds depend on the difference in NAV at the time of investment and at the time of withdrawal or selling consideration.
For an NFO, the starting NAV is less as compared to an old fund as the fund’s investment has just been started.
If the portfolio for both the funds is almost similar and the redemption NAV accounts to the same returns for both funds, then there is no difference between investment in an NFO or an old fund. However, this is an ideal case. Redemption NAV for an NFO is uncertain and hence the returns cannot be stable right from the start of the fund.
Due to this major reason, it is considered that investment in an old fund is safe than an NFO.
Other reasons that can be considered are:
- NFOs do not have a track record to look at
- Higher expense ratio
- Old funds have a well laid out process
NFOs can be considered for investment in closed-ended funds but at the same time the expertise level and the transparency of the fund manager should be taken into account for investment decision.
Timely performance reviews is one of the important criteria when you are investing in an NFO. An old fund with good track record may require only annual performance reviews but an NFO would require more frequent reviews than that.
Check out NFO reviews for our opinion on different NFOs in the market:
Yes, investment in NFO is a good idea but it is accompanied by relatively higher risk but if they are carefully selected and analyzed, investors can benefit from the growth of the mutual fund.
Should I invest in NFO?
NFO stands for New Fund Offer. Mutual Funds have been coming out with New Fund Offer. New Fund Offers are just like IPOs wherein they come out with new funds and investors have to subscribe for the fund.
Mutual Fund companies come out with these NFOs during bull phase when investors are optimistic about the market and are willing to put in more money into the market. It is advised by investors not to subscribe to these NFOs.
Following are the reasons:
· These NFOs do not have a proven track record. Past record of this fund cannot be checked. There are many older funds in the market which can be more relied upon.
· It comes with high initial expenses. Money invested by the AMC in marketing these funds is recovered from the investors
· These NFOs are sector specific and does there is less scope for diversification. Lesser the diversification, more is the risk.
· NFOs are not at all like IPOs. In case of IPOs the price fluctuates as per market expectations whereas here the supply of fund is unlimited.
· This fund is not cheaper than other funds. It is at par with other funds, so investor should prefer to invest in an older fund as compared to this one.
Mutual Fund Companies come up with NFO to increase their bundle of products and to increase their Asset Under Management (AUM). It is always advisable to invest in existing funds in the market.