Mutual funds, a popular investment choice for many, offer diverse options to suit different risk appetites and financial goals. Among these options lies the lesser known yet potentially rewarding avenue of New Fund Offers (NFOs). Go through this article to find out what they are and if you should buy one.
What is an NFO in mutual funds?
New fund offers, commonly referred to as NFOs, represent the launch of a new mutual fund scheme. It’s akin to a store’s grand opening, where investors are invited to be among the first to participate. During an NFO, the fund house offers units of the new scheme at an initial price, usually fixed at Rs. 10 per unit.
Why do NFOs matter in mutual funds?
In the stock market, NFOs offer investors a chance to invest in an innovative portfolio, often with a different kind of investing approach or theme. Unlike existing funds, where you join when the portfolio is already set up, new fund offers enable one to be there right from the start. This may attract those who want something new in their investments or would like to add more variety to their investment holdings.
How to invest in NFOs and make a wise decision?
Here’s a breakdown to help you understand how you can invest in NFO:
- Research thoroughly: Before investing in any NFO, it’s crucial to conduct thorough research. Understand the investment objective, strategy, fund manager’s track record, and the market conditions the fund aims to capitalise on.
- Evaluate the risk and return potential: Assess the risk associated with the new fund offer. While NFOs can offer high returns, they also carry inherent risks, especially since there are no historical performance data available.
- Consider your investment goals: Ensure the NFO aligns with your investment objectives and risk tolerance. While investing in a thematic NFO might be exciting, it should complement your overall investment strategy.
- Consult financial advisors: If you are unsure about investing in an NFO, seeking advice from a financial advisor can provide valuable insights. They can help assess whether the NFO fits your investment portfolio and long-term financial goals.
Benefits of investing in NFOs
- Potential for early advantage: By participating in an NFO, you can enter at the ground level. Early investors may reap substantial returns if the fund performs well in its initial years.
- Access to specialised themes: Many NFOs are launched with a specific investment theme or strategy, catering to niche sectors or market trends. Investing in such themes from the outset can align with your investment goals and beliefs.
- Lower initial expense ratios: During the NFO period, fund houses often offer units at lower expense ratios than existing funds. This can translate to lower costs for investors, especially over the long term.
Cons of investing in NFOs
It’s equally essential to be fully aware of the potential downsides:
- Higher risk: Without past performance data, predicting an NFO’s behaviour in various market scenarios becomes difficult. This makes them a riskier option than established funds with historical track records.
- Overvaluation: Post-listing, the market demand and sentiment influence the price of NFO units. This could lead to prices exceeding the true value of the fund’s holdings, resulting in overvaluation.
- Marketing factor: AMCs actively promote NFOs, potentially leading investors to make decisions based on hype rather than thoroughly analysing the fund’s merits and alignment with their individual financial goals.
Should you invest in NFOs?
NFOs aren’t a one-size-fits-all solution. If you have a substantial risk appetite, the desire to explore new investment avenues, and the time to conduct due diligence, NFOs may have a place in your well-diversified portfolio. However, for investors preferring a more cautious approach, selecting best mutual funds to invest in that have a proven track record of performance can be a safer choice.
