Mutual Funds NFO: Planning to invest in a new fund offer? Check if it is a good or bad idea

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October 22, 2021 11:10 AM

While existing funds have years of track record, one can't guess how an NFO would perform. Investors in an NFO doesn't have much to rely on, except the schemes' offer letter.

new fund offerRepresentative image

New Fund Offers (NFOs) are generally introduced when the markets are doing well. As this is the time when more people are attracted to markets, giving an opportunity to mutual fund companies to make the most of it. This year also, when markets have mostly done well, several new fund offers were launched by asset management companies (AMCs).

Investors are often attracted to new fund offers (NFOs) from Mutual Fund companies because they come cheaper. They also hope that the NFO may offer better returns than the already existing funds in the long run. However, experts say that one should take caution before deciding to invest in an NFO.

According to Vikas Singhania, CEO, TradeSmart, even as the price is low, there are certain risks of investing in an NFO that one should understand.

While existing funds have years of track record, one can’t guess how an NFO would perform. Investors in an NFO doesn’t have much to rely on, except the schemes’ offer letter.

“An NFO is attractive to an investor because of its low price, however, it carries certain risks with it. An existing fund has several years of track record and has a portfolio that can be dissected to see if it matches the investors’ risk, return and volatility profile. On the other hand, an NFO only has the schemes’ offer letter to rely on which generally are too verbose to digest,” Singhania told FE Online.

The NFO offer letter doesn’t provide several specific details. It may keep you guessing about the stocks to be purchased by the fund.

“It does not talk in specifics and can leave an investor guessing on what stocks will be purchased in the fund. Since the NFO does not have a detailed track record of its own, the investor will have to rely on other funds in the AMC to benchmark their expectation,” said Singhania.

Should you invest?

It is risky to invest in an NFO. But then, there is nothing in the markets that comes without any risk. So one should compare both the advantages and disadvantages before deciding to invest or not to invest in an NFO.

“NFOs can offer competitive terms to attract new investors. But investors must do their diligence before investing: in terms of the funds prior performance, and the asset mix of the NFO and how that fits with their own risk and return appetite,” Utkarsh Sinha, Managing Director of Bexley Advisors.

“One advantage of looking at NFOs is that it can respond to the flavor-de-jeur and be constructed to respond to the most immediate opportunities prevailing in the market. It becomes difficult for existing funds to rebalance away from their traditional mix to make the most of a new trend. For example: if you want to participate in the potential returns of new-tech IPOs, you’ll probably need to go that route via an NFO,” he added.

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