Why Are Investors Choosing the NFO Route to Mutual Funds?

Are you looking at an investment to attain your financial goals? Do you want an investment that can offer inflation-beating returns over time? You could consider investing in mutual funds. You have many investors putting money into equity funds and balanced funds through New Fund Offers or NFOs. It is a new mutual fund scheme launched by an asset management company or AMC. You have many AMCs launching NFOs to fill gaps in their product basket or to offer investors new investment themes. Why are investors opting for the NFO route to mutual funds?

What are NFOs?

You have AMCs offering new mutual fund schemes to investors through the New Fund Offer or NFO. It is similar to the initial public offering or IPO, where a private company offers its shares to the public for the first time. You will find NFOs open for a specific time where investors can subscribe to the units of the scheme. 

You may invest in an open-ended mutual fund scheme even after the NFO period expires. It is a mutual fund scheme where investors can enter and exit at any time. 

However, you can subscribe to the units of close-ended mutual fund schemes only within the NFO period. You will find the NFO price fixed at Rs 10 per unit of the mutual fund scheme. 

Why Are Investors Choosing the NFO Route to Mutual Funds?

You have many investors opting for equity mutual funds as fixed deposits are offering low-interest rates. Moreover, many investors missed the stock market rally over the past year and are eager to invest in equity funds. You also have many individuals working from home due to the COVID-19 pandemic. It helps them save money which they infuse into equity funds.

Investors who missed the equity rally over the past year believe investing in NFOs helps them take exposure to equities at a low cost. Moreover, you will find investors deploying funds into NFOs because AMCs offer units at a fixed price of Rs 10 per unit. AMCs heavily market NFOs which induces investors into these new mutual fund schemes.

You have many investors deploying funds into NFOs of balanced advantage funds. It helps you invest in a mix of equity and fixed income securities based on your investment objectives and risk tolerance. Investors who don’t have the skills or the time to pick stocks prefer balanced advantage funds. 

You have the fund manager switching between equities and debt instruments depending on the market conditions. For instance, the fund manager reduces allocation towards equities and increases exposure to debt securities when high stock markets. It helps protect the gains made from these funds when stock markets crash. You also have investors putting money in Flexi-Cap funds through NFOs to get exposure to stocks of companies across market capitalisation. 

Should you invest in NFOs of mutual funds?

You have AMCs launching NFOs to complete their product portfolios or cater to the demand for specific mutual fund schemes. However, these funds may not match your investment objectives and risk profile. 

You may invest in an NFO only if it offers a unique investment theme or strategy which you don’t have in your portfolio. Moreover, the mutual fund scheme is new, and you could wait until it establishes a track record of performance. 

You have many investors taking up NFOs as you get units at Rs 10. It seems cheaper as compared to the Net Asset Value or NAV of existing mutual fund schemes. However, you are better off investing in an existing mutual fund scheme after checking the portfolio composition, track record of the fund and the expense ratio of the scheme. 

You have companies listing their shares on a stock exchange through IPOs. It offers investors the opportunity to make listing gains if the stock’s opening price is above the IPO allotment price. However, NFOs do not offer this opportunity as there are no limits on how many units a mutual fund may have. In a nutshell, you must invest in an NFO only if you lack the investment theme or strategy in your portfolio. 

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

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