New Fund Offer: At a time when returns from most equity-oriented mutual funds have been disappointing and market valuations have increased, fund house management is launching an open-ended new fund offer (NFO). Since January this year, mutual fund houses have raised Rs 39,121 crore from 39 open-ended NFOs. Like initial public offers (IPOs) in stocks, asset management companies (AMCs) launch NFOs to raise money from investors.
There are many recent NFO sectoral/thematic categories, international equities, exchange-traded funds, multi-asset themes. Because AMC wants to take advantage of the growth potential in these sectors/categories. Investors buy the units of the scheme at a fixed rate of Rs 10 per unit. After the NFO window closes, the plans are available for continuous sale and re-purchase at the present-day Net Asset Value (NAV) for sale and repurchase.
When do companies bring NFO
Harshad Chetanwala, co-founder of MyWealthGrowth, says that like an IPO, most NFOs are brought in when the stock market turns bullish. This is in a way linked to the sentiments of investors. Investors are more confident in investing during this time and hence AMC feels that they may be able to capitalize on it.
Keep these things in mind before investing in NFO
Before investing in NFO, an investor should look at the unique investment style and theme. A new scheme that clearly outlines its investment process should be considered. However, if the scheme deviates from this, then investors should see it as a sign of weakness in the investment style.
Investors should analyze whether the NFO is only to cache a particular theme, which is currently in vogue, but the subject is not sustainable in the long run. They should avoid such funds. In other fund house schemes, investors will also have to look at the track record. Most importantly, investors should analyze their risk profile and liquidity needs before investing in NFO.
What to say about expert
Chetanwala of MyWealthGrowth says that investment in any fund should be based on the needs and profile of investors. Generally, it is better to invest in an on-going fund rather than an NFO as long as the new fund offers a unique opportunity to invest that is not in the existing products.
Brijesh Damodaran, founder and managing partner of BellWether Advisors LLP, says that if the NFO is investing in an entirely new category or sector or geography, then investors can consider investing in it. It should be completely new and there should be no such popular scheme. This year, two such NFOs have attracted attention, such as the S&P 500 scheme (targeting US stocks in the S&P 500) and a healthcare index fund.
Better to invest in existing schemes
Although investment in NFO may seem attractive, experts suggest that one should invest in existing schemes. Because his investment style, asset under management, portfolio and past returns are well known. It is always better to put money in a scheme that has a better track record than any new fund. These inputs are not available for new funds.
Do check the track record
Existing funds that have looked at the bull and beer market cycle are better at giving better returns in the long run. Damodaran says that investors should generally stick to schemes with a track record of two to three years. Avoid investing in NFO via SIP route. Investing over the long term should be based on the track record of the scheme. Even after investing in NFO, regularly review the performance of the fund and monitor whether the fund is capable of generating alpha on its benchmark.
(Author: Saikat Neogi)
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