Assess the Pros and Cons of Mutual Fund NFOs Before Investing

When an Asset Management Company introduces a new mutual fund scheme, it is known as NFO. It stands for New Fund Offer; it is extended to the public before making it accessible for daily transactions. It functions similar to IPOs, wherein both are open to the public first for raising capital.

Pros of NFOs include – NFOs are open at Rs 10 only, and they are launched during the bull phase of the market. Cons of NFOs – you have no track record to refer to, offers a low degree of diversification, and the cost is equal to peer funds.

How do an IPO and NFO differ

Although everyone believes that mutual fund NFOs are precisely the same as IPOs, there are a few differences. NFOs are open for Rs 10 per unit; it does not function based on the demand and supply model. A fund manager is allowed to issue as many units as they intend to when the demand increases but will not impact the price. However, in an IPO post subscription, after the stock is traded in the market, its price will depend on the demand.

Let’s look at the merits and demerits of investing in mutual fund NFOs in detail

1. NFOs are open at NAV of Rs 10 only. However, it would help not make your investment decision based on a Rs 10 offer only. This is because NFOs are offered to the public at a discounted price during their launch. This low price brings excitement amongst investors; mutual fund firms market NFOs aggressively to attract investors. NAV does not play an active role in your mutual fund investment. NAV is only a measure of a unit.
2. A mutual fund’s performance objective is written on a fact sheet. You will need to check if the written performance objective is new or copied from other funds. You also need to check a fund’s asset allocation strategy. You need to check if the investment will be made in large-cap stocks, mid-cap stocks or a basket of funds or stocks. If you feel there is uniqueness compared to other funds and think that the fund will work in the long run, you can invest in that NFO.
3. As NFOs are new in the market, they do not have a track record. Hence, if you are looking at investing in an NFO, you could perform a background check on the AMC. By doing this, you get to ensure if the fund house has been part of the mutual funds’ industry for quite some time, say a minimum of 8 to 10 years. With this analysis, you can assess the past performance of the fund house and how it has performed during market ups and downs. When the AMC shows a good track record, it is quite possible that the NFO could execute the mandate.

Though there is nothing wrong with NFO investments, there are certain factors you need to look at before investing in them. NFOs come with relatively higher risk; however, if carefully analysed and chosen, you as an investor can benefit from the growth of a mutual fund.

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