Things to Check Before Investing in an NFO

Do you prefer investing in a new mutual fund scheme? Is it a chance for you to buy a cheaper mutual fund? The mutual fund house will issue units of a scheme for the first time through the New Fund Offer or NFO. The fund pools money from many investors and invests in stocks or bonds depending on the investment objective. You get an opportunity to buy the mutual fund units at a low price. However, you must check some important things before investing in the NFO. 

How does an NFO work? 

The NFO may be open-ended where you may enter or exit the investment at any time. It could be closed-ended where you must buy the units of the scheme within a limited period of around 15 days. You cannot redeem the investment before the specified maturity period. 

You may invest in the units of the NFO during the limited period at an offer price of around Rs 10 per unit. The fund closes for subscription, and the fund manager invests the corpus in stocks based on the investment objectives of the scheme. The closed-ended mutual fund scheme lists on the stock exchange, and you can buy and sell the units just like shares. 

You can buy the units of the mutual fund scheme only at the prevailing NAV, after the expiry of the NFO period. It is usually higher as compared to the NFO price. You may invest in the NFOs of debt schemes. However, many of the investors prefer the new fund offers of equity schemes. 

Also Read: IPO Investing: Is It Worth the Risk?

Things to consider before investing in NFOs?

• You must go through the Scheme Information Document (SID) and check the investment objective of the mutual fund scheme, before investing in the NFO.
• You must check the previous track record of the fund house and the fund manager before investing in the NFO. A fund manager with a history of a strong performance would manage the new scheme in a better way.
• You must invest in the NFO after taking a look at the costs associated with the scheme. The newer funds manage a small corpus and have a higher expense ratio. You must invest in a mutual fund scheme with a lower expense ratio to increase your return.
• You must check the investment theme of the NFO before investing your money. You can invest in the NFO of the scheme if the fund house offers a unique proposition for the long-run.

Should you invest in an NFO?

The financial advisors recommend that you invest in existing schemes with a proven track record of performance over the long-run. You may invest in the NFO if it covers a gap in your portfolio. Otherwise, it would be best if you waited until you get a clear idea of the performance of the new scheme. 

Don’t invest your money in the NFO just because the fund house offers a lower price. You must check the other costs before you commit to the investment. Don’t allocate a significant portion of your portfolio towards the new fund offer. Diversify your portfolio and spread your investment across asset classes. In a nutshell, the NFO doesn’t have a past track record where you can measure the performance of the scheme. You must invest in the new fund offer only if it matches your investment horizon and risk appetite. 

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