Should You Invest in a Mutual Fund NFO?

The arguments in favour of and against mutual fund NFOs

The easiest answer to what is NFO in mutual fund is similar to what an Initial Public Offering (IPO) is to the share market. It is an unproven commodity that is testing the waters in the financial world, just like IPOs. But does that make them untouchable? In the case of IPOs, we often see an overwhelming response from investors. IPO investors get sufficient data to take an informed decision based on company information, prospectus, analyst’s verdict etc. In mutual fund NFO (New Fund Offers) investment can similarly be done with proper research. Also, investors need to understand whether they should or shouldn’t invest in them.

If you are planning to invest in NFOs, you must know that broadly there are two types of NFOs,

• Open-ended funds are funds where you can withdraw the investment at any time,
• Close-ended funds require you to remain invested for a specified maturity period.

Also Read: What is NFO and how to invest in NFOs

When to invest?

Here are a few factors that can encourage you to invest in a particular NFO,

• Fund house – The reputation and track record of the fund house is an important criteria. A fund house with a good track record would have delivered high returns and performed resolutely during market downturns. 
   
• Category – The NFO should fit into a category that you were looking to invest in. Equity or debt, large cap or small, thematic or exchange traded funds, you must know where the NFO is going to invest your money. There is no point in investing in an NFO that replicates one of your existing mutual fund schemes.
   
• Investment needed – Before investing in an NFO, you will check not only the minimum subscription amount but also the expense ratio, the exit load and any other expenses involved. If you are planning to start an SIP, you would also consider the minimum SIP amount required. 
   
• Management – Investors also like to take comfort from the track record of the fund managers involved. If the NFO has a celebrated fund manager(s) it could be another reason to go for it.

Also Read: Got questions about new fund offer NFO here are answers

Why NFOs are doubted?

As mentioned earlier, NFOs have no track record which makes it difficult for investors to gauge their future performance. Besides, NFOs are also doubted because,

• Considerable money is spent on marketing NFO as a product. Thus, an NFO has a high initial cost that could be passed on to the investors,
• Although similar to IPOs, there are a few key differences in NFO. NFO units are unlimited in supply, unlike IPO shares. Retail investors have a quota and special discount in most IPOs, none of which is available in NFOs. Being unlimited, NFO units are not as dependent on market demand as IPO shares,
• The timing of the fund investment is important in NFOs. How the stock market is performing at the time when the NFO fund invests its proceeds is what decides the future appreciation of your NFO investment,
• The availability of existing mutual funds with their track record, AUM details and a host of other information makes the NFO investment strategy look like a shot in the dark.

Investments in NFOs may be made if as an investor you are convinced by the fund, the risk involved in it and its uniqueness to your portfolio. If you get exposure to a desired and previously unavailable asset class, you should invest in an NFO to meet your financial goals.  

Also Read: How IPOs differ from NFOs