Should you invest in NFOs?
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If you have been reading financial news, you must have come across news stating the launch of a new mutual fund or two. New things are always enticing and look interesting but before proceeding with it, you should be little careful. It is always better to be careful, then repent it later.
There are many types of mutual funds catering to the different types of investors. When fund houses want to launch a new fund, the fund is initially open for subscription for a specific period of time. This period is known as the NFO period. If the fund is a close-ended fund, then investors can only subscribe during the NFO period. However, if the fund is open-ended fund, then it will open for investment after the NFO. Investors can invest and redeem from the fund like a normal fund.
The amount collected during the NFO will be used to invest in various market securities depending on the investment objective of the fund. NFOs give an opportunity to invest in a new theme or a new asset class.
However, many people have misconceptions around NFOs.
The first misconception around NFO is that it is like an Initial Public Offer(IPO). NFO and IPO are two different things. While in an IPO, you invest in a company in the primary market, in case of a NFO, you will be investing in a fund, which will invest in various securities. In case of an IPO, the offer document consists of company’s operations, risks, financials and industry background. The offer document of NFO mentions the scheme’s investment objective, risk factors, asset allocation and details of the fund manager.
The second myth is that NFOs are cheap. Investing in an IPO may be cheap if the stock in the secondary market performs well and the stock price shoots. However, it is not the case with NFOs. As per regulatory requirement, fund houses have to set Rs.10 for each unit of the new fund. The main benefit of investing in mutual funds comes into the picture when the fund value appreciates. Hence, if you have units Rs.10 or Rs.100, the capital appreciation will be in the same proportion. That means the returns fetched by the investors will be the same.
Now, what you know what are NFOs and the myths associated with it, the main question comes how you are going to evaluate it.
Checking the fund’s objective is the first step to understand whether the fund is right for you. If your investment objective is capital appreciation over the long term, then a NFO that seeks to protect capital, may not be the right one for you. Simply put, if you want to invest in an equity fund, investing in the NFO of a debt fund, may not help to fulfil your financial goals.
The risk associated with different funds vary from each other. Similarly, the risk of the NFO will also be different. Hence, it is recommended that you analyse the risk factors. Typically, one should take risk as per their risk profile. The risk factors of an international fund will be different from a fund that invests a major part in Indian equities. The risk factor of a debt fund will be different from an equity fund. Hence, you may invest in an NFO after keeping the different risk factors of the fund.
The fund manager is going to the captain of the fund. He or she will pick up the stocks as per the investment objective of the fund and lead the ship during good and bad times. Hence, the experience and track record of the fund manager is of utmost importance. It is essential as the new fund comes with a clean slate and there is no way to check the past performance of the fund.
To summarise, if you want to invest in an NFO, make sure that it is a new breed of fund that hasn’t yet been launched earlier and if you are sure about the investment prospects of the fund. It is because there are already many well established fund under the different categories of mutual fund and they come with track record which makes it easy to predict the future performance of the fund.
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