NFO means New Fund Offer. Whenever a mutual fund company launches an NFO, it is heavily promoted. There are interviews of fund managers in channels and newspapers, in which the investment strategy of the new fund is told. Its merits are counted. Such an environment is created that mutual fund customers can earn tremendous profits if they invest money in it. But is it true? Should fund investors invest in NFO?
Before this question it is important to know that what is New Fund Offer ie NFO? Actually, whenever an Asset Management Company (AMC) launches a new fund, it is open only for a few days. Its purpose is to buy shares for the fund portfolio and hence to raise money through it. In a way, money is raised to start a new fund. This whole process is called New Fund Offer.
In many ways it looks like an IPO but it is not like that. According to the existing rules, the period of NFO in India ranges from 3 to 15 days. If the fund is open ended, then investment starts in it after a few days. If closed ended, the investor can subscribe during the NFO period but will have to hold it during this period. Now the question is whether you should invest in NFO or not. Most of the experts do not recommend common mutual fund investors to invest in it. But why? Some of the reasons for this are as follows-
no track record
Since this fund is new, it does not have any track record, seeing which we can make an investment decision. That’s why most investors look at the past performance of the fund house and invest in its NFO. But this is not the right strategy. Because new investment strategy comes with new challenges and you never know whether this fund will be successful or not. So it is always better to invest in a fund which has a strong track record.
NFO is not IPO
NFO sounds like IPO but but it is not like it. Many investors think of it like an IPO and they feel that the way they benefit when the demand for shares increases, so will it be in this too. but it’s not like that. The law of demand and supply has no effect on the NAV of a mutual fund. How many units will be in a mutual fund is not decided. Units are made when needed.
Every fund has an expense ratio. Higher expense ratio means that you are paying more money to manage your fund. Obviously this will reduce your returns. Funds with smaller AUM (Asset Under Management) can charge higher expense charges as per the regulation rules in India. When an NFO is launched, its AUM is usually small. Therefore, its expense charge is likely to be high. Therefore it is expensive.
If an NFO is launched at a particular time, then it is not necessary that this is the right time to invest in it. AMCs also bring in NFOs to expand or complete their product basket. That’s why NFO has been launched so investing in it is not a good strategy.
Overall, investing in NFOs is like shooting arrows in the dark. So instead of uncertainty, invest in funds that have a strong track record. If the NFO is something special and fits your portfolio, then wait a while to see if its theme and investment strategy suits the stated objective.