Is it good to invest in NFO of Mutual Funds?

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:

• Launched during the bull phase of market
• Open at Rs.10 only

Cons of NFO are:

• No track record
• Higher expenses
• Low degree of diversification
• Cost is equivalent to peer funds

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:

HDFC NFO 

IndiaBulls Tax Saving Fund 

Axis Multicap fund 

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?

• 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.
• The other factors considered before investing are the structure of fund house – is it fund manager driven or team driven, performance of similar schemes and the other processes followed by the fund house. The NFO that is going to add value to your portfolio should be valued i.e. an NFO which is distinct from your existing schemes in the portfolio and which minimizes the risk and diverse your portfolio.

Merits:

• 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.
• NFO are offered at the discounted price at the time of launch similar to IPO in stock markets. This creates an excitement among investors in case of mutual funds’ NFO. NFOs are marketed aggressively by the mutual fund companies to attract the investors.

Demerits:

• After the NFO period is over, the fund units are offered at the current NAV price only. So, the discount factor remains only for a certain period.
• 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.

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.