3 Questions to Ask Before Investing in an NFO?

Are you looking at a unique investment opportunity to achieve your financial goals? Do you want a low-cost investment that can offer inflation-beating returns in the long run? You may consider investing in the New Fund Offer or NFO. Asset Management Companies or AMCs offer investors an opportunity to invest in new mutual fund schemes through the NFO. You have many first time investors in the stock market opting for the NFO route to invest in equity fund schemes. However, you could ask these three questions before investing in an NFO.

What is an NFO?

You have mutual fund houses offering units of new mutual fund schemes through NFOs. It helps AMCs raise funds from subscribers to purchase securities such as stocks and fixed income securities based on the fund’s investment objectives. 

You can subscribe to the units of a new mutual fund scheme through the NFO. However, you must invest in the NFO only if it offers you the opportunity to invest in a new investment theme or strategy.  

Let’s look at three questions to ask before investing in an NFO.

How long will it take for the investment strategy to play out?

You have many subscribers investing in new mutual fund schemes through NFOs because they offer a unique idea or theme. However, you must also check if the investment theme can provide higher returns over time. You must invest in the NFO only if you are willing to give time for the investment theme to play out. 

You have subscribers investing in NFOs only if they believe the investment strategy can perform well across different market phases. Otherwise, you may invest in an existing mutual fund scheme that has outperformed its peers and the benchmark over some time. 

What is the nature of returns from the fund?

You may prefer investing in new mutual fund schemes through NFOs. However, you must check if the mutual fund scheme fits your investment objectives and risk profile. 

For instance, you may avoid investing in an NFO of a Flexi-Cap scheme if this is your first time in the stock market. It invests in shares of companies across market capitalisation. You must avoid investing in these funds if you don’t have higher risk tolerance. 

You have many investors putting money in NFOs of index funds. It follows a passive investment strategy that mimics a market index such as the Nifty 50, Nifty Next 50, or the Sensex. 

You get returns from these index funds in line with the market index it tracks. However, you may consider avoiding NFOs of index funds if you are not comfortable investing in stocks. 

What is the strategy of the fund?

You have many investors putting money in NFOs even though they can’t understand the fund’s strategy. For instance, why invest in NFOs of international funds if you don’t want to diversify your portfolio beyond the Indian stock market?

You must invest in the NFO only if the new mutual fund scheme offers something different from other funds in your portfolio. Otherwise, you can invest in an existing mutual fund that has outperformed the benchmark across market phases. In a nutshell, invest in an NFO only if you are comfortable with the investment style of the mutual fund scheme. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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