New Fund Offers (NFOs) can be a great way to invest in a new mutual fund scheme. When an asset management company (AMC) or a mutual fund announces an NFO, it allows investors to invest in the fund for the first time. Capital raised through the NFO can be used to invest in various securities such as bonds and equities. There is a predefined period during which investors can apply for the units. Once the NFO period closes and the scheme gets listed, investors can then purchase units of that scheme at their Net Asset Value (NAV).
But are NFOs worth investing in? Knowing about what benefits you could get from investing in an NFO, along with what to consider first, can certainly help you make more informed decisions.
Benefits of investing in a New Fund Offer
Introduction to new themes
Most times NFOs introduce new themes that may have the potential for growth but were previously unexplored. This can be a great opportunity to expand your portfolio and diversify your investments for higher returns.
Timely investment opportunities
Sometimes mutual fund schemes may launch NFO at peak market times. This allows you to select investments when valuations are favourable with potential for capital appreciation.
Cheaper than existing funds
Generally, when a New Fund Offeris launched, it tends to be cheaper than existing funds. This is because NFOs are new to the market and have yet to build up a track record.
Closed-ended fund schemes can be bought during the NFO period and redeemed when the funds reach maturity. In case of an open-ended fund, even if an NFO window closes, you can still acquire units at their declared NAV price.
So, should you invest in New Fund Offers? Things to consider
Read NFO document
Read the document that is released by the AMC when an NFO is launched. These documents contain all the necessary details of the fund, including its objectives, asset allocation pattern, profile of its fund manager, benchmark index, that helps you compare performance with similar mutual funds, etc. This helps you examine if the fund matches your risk profile and mutual fund investment goals.
NFOs have no track record
Since NFOs are newly launched, they don’t have any historical performance data that you can look at to predict how well the fund may do in the future. However, you can look at the past performances of similar funds to get a general idea.
Expenses could be on the higher side
NFOs have comparatively small fund sizes when they are first launched. This gives the AMC an added flexibility in terms of pricing expenses, and they may keep the expense ratios relatively high.
Check if the NFO is offering a unique theme
Check whether the NFO is offering something unique. Many mutual funds already exist, so a fund that offers something different with a distinct theme or sector focus may be worth exploring further.
Reputation of the AMC
The track record of a fund house can tell you a lot about how well-managed and -researched the newly proposed scheme might be. Established fund houses with previous proven successful schemes are more likely to launch another successful product than those without much experience.
So, are NFOs worth investing in? They are, provided you take the time to do your research and understand what is involved. Consider these pointers mentioned above before investing in NFOs and remember to monitor the fund’s progress even after you have invested.