How to Pick the Right New Fund Offer (NFO)?

Are you looking at an investment to achieve your financial goals? Do you seek a professionally managed investment? You may consider investing in mutual funds if you lack the knowledge or the time to manage your investments. However, many people recommend investing in mutual funds during its new fund offer or NFO. You have AMCs raising capital by launching new mutual fund schemes for the first-time subscription through the NFO. However, should you invest in mutual funds during new fund offers, and how can you pick the right NFO?

What is an NFO?

You have asset management companies launching new mutual fund schemes for the first-time subscription through NFOs. It is similar to an initial public offering or IPO, where companies offer their shares to the public for the first time. 

You have NFOs launched at Rs 10, which is their net asset value or NAV. Moreover, the NFO is open for subscription only for a maximum period of 30 days. You may invest in the mutual fund after the NFO period only at the prevailing net asset value. 

Should you invest in mutual funds through NFO?

You have many mutual fund houses launching NFOs after the SEBI reclassification in 2017. It helps fund houses plug gaps in areas where they are currently not present. For instance, you have AMCs launching exchange-traded funds, thematic funds, index funds through NFOs.

Many experts recommend investing in mutual funds only after checking their track record. However, the absence of a track record makes it difficult to gauge the performance of new mutual fund schemes launched through NFOs. 

You will find AMC’s launching new mutual fund schemes through NFOs during a bull market. For instance, mutual fund houses have raised Rs 27,315 crore from December 2020 to May 2021 through NFOs. Moreover, as NFOs are marketed heavily, many investors believe this is the right time to invest in new mutual funds.

You must invest in mutual funds through NFOs only if they match your investment objectives. Moreover, you must select mutual funds with a good track record instead of new schemes launched through NFOs in an existing category. 

You have many investors looking to make profits through NFOs in a similar way as IPOs. However, you can get listing gains from IPOs because of the demand-supply mismatch of shares, unlike NFOs, where new units match excess demand. 

How to pick the right NFO?

New investors may avoid investing in mutual fund schemes through NFOs as they don’t have a track record to gauge their performance. However, savvy investors who want to invest in a new theme may consider NFOs after checking the AMCs and fund managers track records. 

You may consider avoiding mutual fund schemes launched through NFOs if they have similar holdings as other funds in your portfolio. For example, an AMC may launch a large-cap fund through an NFO. It helps if you avoid investing in this NFO if you already have large-cap funds in your portfolio. 

You may pick an NFO only if it offers a new investment strategy with the potential to yield results over time. It helps to check the investment theme, track record of the AMC and fund manager, expense ratio and the tax implications for selecting the right NFO. 

You may invest in an NFO only if it adds value through a differentiated investment strategy. Otherwise, you may stick to mutual funds that have consistently outperformed their benchmark index over time. In a nutshell, you may wait till mutual funds launched through NFOs perform across market cycles before investing in their units. 

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