A New Fund Offer (NFO) is a mutual fund that is offered to public before it opens up to daily transactions. It is similar to IPO (Initial Public Offering - Stocks) in many aspects but not exactly same. Often, investors choose to invest in NFO because they assume they are investing into something so cheap. But it is important to check if the NFO is new or something of similar exists in the fund house already.
In an IPO, investors are given a direct offer to buy the company's share which can be traded later in the share market.In the same way, NFO is subscription offers for a newly launched scheme where investors can buy units are a fixed price.
Usually, investors prefer to invest when there is a bull market and look for cheaper opportunities. Since NFOs have a fixed rate of ₹10, they believe it to be cheaper than other funds and invest heavily into it. But it is really a good idea? Check out below:
NFOs are NOT cheap:
Investors believe that investing ₹10000 in NFO which has a NAV of ₹10 is better than investing in an ongoing fund that has a NAV of ₹15. But, truth is that there is no advantage in investing a lower NAV as the growth of a fund depends on portfolio it holds. In other words, the percentage growths of NAVs are more important in yielding you benefits than its initial value.
Diversification is limited:
Diversification is the key to limiting the risk on your portfolio. But NFOs are sector specific or focus on a certain category. Therefore, make sure you understand the objective of a NFO before investing in it to avoid restricted diversification.
High initial expenses:
NFOs are not as innocent as they claim. They come with high marketing and initial expenses which are managed out of the NAVs over a period of time. This in turn gives reduced returns in the hands of the investors. New funds are usually avoided because of these above-average charges.
No proven track record:
Experience counts in every aspect of life as well as mutual funds. This is why advisers recommend funds that have a historically proven track record. A fund that has gone through several market cycles is prepared to protect your investments and provide you better advantage in a bull market. But the same can't be done by NFOs as they are newly introduced. When investing in ongoing funds, one can always find similar funds in the market which has been reviewed, analyzed and rated by experts. This helps the investor evaluate the future of the fund. NFOs are launched with a new theme/ sector and so it is not possible to analyze the future of the fund. In NFO, you only have the fund's mandate ad outline with no idea if the strategy will be successful or not.
NFO is different from IPO:
In IPO, the listing price varies according to the market expectation and demands while in NFO the NAV is fixed at ₹10 per unit that is not affected by the market. At the time of investing, the fund has no stocks and therefore you do not know if the underlying funds purchased later are cheap or expensive.
On a closing note,
There is only so much you can invest and so it is important to evaluate every new strategy you are introduced into. Sometimes a plain equity scheme can give you better benefits. Remember that you aren't missing anything important by choosing to stay away from NFOs. It is better that you avoid NFOs unless you are equipped enough to face the negatives.