Whenever a fund house launches an NFO, there is a lot of buzz in the market. You see ads everywhere.
And mutual funds have been busy launching new schemes in either core categories or in the thematic funds, target maturity funds (TGF) or exchange-traded funds. Just in January 2023, 15 new NFOs are being launched.
With so much happening, you might get confused. And start wondering if investing in NFOs is better than investing in existing mutual fund schemes? So let’s clear up this confusion.
Estimated read time: 2 minutes and 47 seconds
Buckle up, here we go!
What is NFO?
An NFO, or New Fund Offer, is the launch of a new mutual fund by an asset management company (AMC).
A mutual fund is a type of investment that pools money from many different people and uses it to buy a diverse mix of stocks, bonds, and other securities.
When a company launches a new mutual fund, it’s called an NFO. During the NFO period, investors can buy units in the new mutual fund. After the NFO period ends, which usually lasts for a maximum of 15 days, the fund starts operating.
You can learn more about different types of equity and debt mutual funds available in India, here.
What is the objective of NFO?
NFO’s objective is to accumulate adequate initial capital from the NFO applicants and ensure that the fund manager can build an ideal portfolio based on the fund’s investment objectives.
Besides raising capital, an NFO can help AMC increase its brand awareness and attract new investors. By launching a new mutual fund, the company can showcase its investment expertise and attract investors who are looking for new opportunities to diversify their portfolios.
Should you invest in an NFO?
People assume NFO to be like IPO (Initial Public Offering – Individual stocks). They think if there is a demand for an NFO, they can make a profit on the launch, like IPO gains.
But that doesn’t work much for NFOs. And the performance of NFOs in the initial period after launch is usually rough because of many factors like market conditions, investing enormous assets in a short time is tough, etc.
And it’s important to note that investing in a new fund can be riskier than investing in an established fund, as the track record of the new fund is not yet known.
Majorly, we invest in mutual funds for the medium or long term, right?
We always analyse the basics of a fund, like investment style, the risk associated with it, the manager, AUM, its track record, etc. before investing in them.
So, investing in NFOs is like a shot in the dark. It will be wise to opt for an existing scheme that has a proven track record instead of going for something new or unpredictable.
Marketers and distributors hype NFOs. Please avoid them unless you are an expert in analysing the NFO and are able to derive additional value from it.
Therefore, if a fund is being launched in a category where funds already exist, picking a fund with a track record makes a lot more sense. You will know what you are getting into as you can evaluate it on various parameters like past performance and the risk it takes, amongst other things.
Always pick a fund with a history and proven track record over a new fund. But remember, past performance doesn’t guarantee future performance.
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