If you are a mutual fund investor, one of the ways to invest is through New Fund Offers or NFOs. When a mutual fund comes up with a new fund or series of a scheme for subscription, it is termed as New Fund Offer or NFO.
Currently, there are 10 New Fund Offers open for subscription. Before The NFOs are catagorised into income scheme, growth scheme and ELSS schemes. You can also take tax benefit by investing in ELSS NFO.
But most of the new investors keep on asking the question - should you invest in NFOs when there are a multitude of tried and tested funds on offer? Opinion of experts appears to be divided on this issue.
Anil Rego – Founder & CEO, Right Horizons told to moneycontrol that for instance, in 2017 so far there have been 30-odd mainboard IPOs. But one-third of them are trading below issue price. On the other hand, most of the equity NFOs launched are doing well. The reason being the judicious portfolio approach taken by fund managers. NFOs may be a new product with no history, but the experienced fund manager and the time-tested portfolio approach ensure that investors' interests are always protected irrespective of market conditions. “With a single stock or security, such an approach cannot be taken and hence it is fraught with risk of money loss," he said.
New fund offers have the potential to gain momentum significantly once they are being traded through a successful campaigning. These NFO's can be open-ended or close-ended that is, under open-ended, you can enter the market and purchase any number of share through mutual fund schemes anytime while under close-ended, the subscription to make an investment is time-bound where the issuance of shares is also limited.
The subscription to any NFO starts with Rs 10, which can also be driving motive for an investor to make the investment and purchase more units. However, you should ideally track all the factors before subscribing to any NFO.
Mayank Bhatnagar, COO, FinEdge, however, feels investors need to exercise caution before committing their money to NFOs. “We fail to find a compelling enough reason for investors to opt for newly launched funds, over funds that have well-established track records of navigating challenging market cycles. Anecdotal evidence tells us that most investors still invest into NFO’s for all the wrong reasons – topping the list is the fallacious belief that ‘a low NAV is cheap’, and it is, therefore, better to invest into an NFO because it has a net asset value of Rs. 10. As the sad plight of most of the NFO’s launched shortly before the carnage of 2008 will show, this is far from the truth! Some of these NFO’s are still tottering in the red, even a decade later,” Bhatnagar said.
If an NFO fails to collect enough funds, its marketing and distribution costs would be apportioned over a smaller asset base, leading to a higher expense ratio and compromised returns. This risk is more imminent in the case of NFO’s launched by smaller AMC’s that do not have the marketing firepower to reach sizeable swathes of the investing community. “More equity-oriented NFO’s are launched when markets have already gone up significantly, with the intent of cashing in on buoyant retail investor sentiment more than anything else. This may lead to a poor initial investment experience for uninformed first-timers who were unable to resist the allurement of those colourful billboards!” says Bhatnagar.