There’s usually a lot of excitement any time an NFO is launched. You’ll see advertisements everywhere, newspaper articles and the fund manager talking about the new fund and its investment strategy.
You might get carried away and invest without doing proper research with all this chatter. This article takes you through factors to consider before investing and whether it’s a good idea.
What Are NFOs?
The first thing an asset management organisation does when they launch a new fund is to open it up for a subscription for a few days. Companies do this to kick start the new fund and gather funds to purchase stocks for the new fund’s portfolio.
NFO is an acronym for New Fund Offer, which refers to how asset management companies create new support based on first-subscription to finance the buying of assets. Most investors usually look for opportunities to invest in mutual funds when markets peak.
In many ways, it’s similar to an Initial Public Offering (IPO), which compels people to purchase assets in the NFO period. However, there’s no advantage like in IPOs.
After the NFO period, the fund becomes open-ended. Within a few days, new investments are accepted. Therefore, you can still invest in the new fund after the period.
If the fund is close-ended, you can only make subscriptions in the NFO period, and you’ll have to hold it for the entire duration.
Why Do Investors Invest In NFOs?
Asset management companies use NFOs to raise money from the public to obtain market tools like bonds and equity shares. NFOs are cheaper than current funds since they are new to the market.
Some investors mistake mutual fund NFOs with IPOs. Therefore, they assume they’ll make some quick cash once listed. However, NFOs are like IPOs, in which the public can buy shares before they hit the stock market. There was a time when people generated fast cash through stock IPOs.
Additionally, there’s immense marketing effort channelled into promoting NFOs that gives people the fear of missing out. However, this doesn’t mean you should dive in headfirst—use intelligence and discretion.
Some investors believe in investing in NFOs with low Net Asset Value (NAV). Therefore, most people prefer investing in NFOs that have NAVs with Rs 10 than existing funds with higher NAVs.
Factors To Consider Before Investing
Before acquiring shares, it’s essential to do extensive research on the fund house to determine its history. Ensure you look into their objectives, risks factors, returns, costs, and minimum subscription.
A thorough background check will help you determine a fund’s performance and make a sound investment decision. A fund with a good track record will likely have an NFO to generate healthy returns on your investment.
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Reasons Why You Should Avoid Investing In NFOs
1. Lacks Track Record
New funds lack track records. Without a history, individuals rely on the fund’s previous performance, which isn’t the best approach. A new investment strategy has its unique challenges, and you can’t know if the fund house is skilled to overcome those drawbacks.
Additionally, you only know the fund’s broad mandate. You are not aware of what will make up its portfolio or if the fund can execute its mandate properly.
It makes more sense to pick a fund with a proven track record rather than a newly launched one. You’ll have an insight into what you’re investing in as you can assess various parameters like previous performance, risks and other things.
2. NFOs Aren’t Like IPOs
Most people think that NFOs are similar to IPOs, where they profit with increased demand for funds—this notion couldn’t be farther from the truth. This is because supply and demand don’t affect a mutual fund’s NAV (Net Asset Value).
Here’s why—stocks have a limited number of available units, so their prices increase if demand is higher. Contrarily, there’s no limit to the number of units a mutual fund can have. Units are created when needed.
3. Launch Timing
Asset Management Companies (AMCs) launch new funds to increase or complete their product basket. Sometimes it could be because of high demand for a specific type of fund.
Just because a new fund is launched doesn’t mean it’s the appropriate time to invest. Especially if market demand is the main trigger, it’s advisable to stay away.
However, you can consider investing if the NFO is for a close-ended fund and fills a gap in your portfolio. Ensure you’re aware of the fund’s investing strategy since you’ll be committing for a defined duration.
4. Higher Cost
All funds charge fees to manage your money. This is a percentage of the portfolio deducted from the profits generated—the expense ratio. A higher expense ratio signifies a higher fee, which affects your dividends.
Since a newly launched fund is usually small in size, Asset Management Companies (AMCs) have the flexibility to maintain expense ratio on the higher side.
Wrap Up
NFOs investment is like a shot in the dark. It’s prudent to select an existing scheme with a proven track record rather than opting for a new one that’s unpredictable.
Even if the fund is distinct and can fill a gap in your portfolio, hold back for a while to determine if the investment strategy turns up as intended.
