NFO- a bane or a boon?

India is a country where anything on “limited offer” automatically sees a rise in demand. The discount sentiment runs so high in our veins that we seldom focus on the quality we are getting. Not to say that all short-lived or discounted schemes are low on value-add, but to emphasize that we must research before grabbing the opportunity lest we end up with burnt fingers. Which brings us to the current theme of an NFO (New Fund Offer). An NFO is like the early bird subscription to a new type of mutual fund launched by the AMC. NFO is launched for a predefined and limited period, during which investors are advised to invest in it. This large cash inflow together is then invested in the securities in line with the investment objective of the fund by the fund manager.

Let us look at a few features of NFOs-

Close-ended: Investments in an NFO can be close-ended at times i.e. the entry and exit from the fund are locked in. You shall not be able to redeem the fund at your discretion, except on a stock exchange where the units often sell at a discount to the fair value of the fund. Hence, this needs to be a checkpoint before you consider to invest in it.

Lower NAV: The highest selling point of an NFO is the lower NAV at which the units are sold (usually Rs 10). While you contemplate what could possibly go wrong with a low NAV, we would only like to point out that a low NAV today is not an indicator of how the fund is going to perform in the future. A mutual fund with a higher NAV as well as the mutual fund with a lower NAV can hold almost similar stocks or bonds. So, think it through before hoarding the units.

No past record: The fact that it is a “new” fund offer implies that there is no track record to go by or base your investment on. Whether or not the fund does well is purely basis the speculation as there is no measure to track the consistency of the fund performance. It is more important to analyse the mutual funds holdings, which category, sector or theme does the mutual fund plan to invest in.

Our verdict

We are not against NFOs but we do maintain that they require a certain amount of discretion. They must be considered only when they come with a brand-new investment strategy that is in line with your own goals. Let us consider a hypothetical scenario and assume that your portfolio has both equity and debt funds in a decent proportion and you are looking to diversify further into a new equity category that has been recently announced and it is feasible for you to invest in them as part of your diversification strategy. Now, when an AMC comes up with an NFO with such a classification, it might just make sense for you to go for it and invest. Hence, the diversification of your portfolio is a good reason to invest in an NFO. But adding a fund to your portfolio that is similar to one that exists just because it is being offered cheaper, might not make so much sense in the long run.

You can always turn to WealthApp for more such investment planning queries. Our financial advisors would be happy to serve you!

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