New Fund Offers from Mutual Funds are on the rise. But is it a good idea to invest in them? Let’s find out.
Mutual Fund houses are finding novel ways to encourage people to invest in equities. With the help of thematic advertising, these houses are trying to catch the attention of the young and motivate them to start investing. As the performance of equity markets heads upwards, fund houses are increasingly introducing New Fund Offers (NFOs).
So what is an NFO? Is it a good idea to invest in Mutual Funds via them? Let’s find out.
What is an NFO?
New Fund Offers (NFOs) are first-time subscription offers for a new scheme that an asset management company launches. They aim at raising capital from the public in order to buy securities like shares or government bonds from the market.
A fund house launches an NFO to complete its product offering, or if there is a demand from investors for a particular investment theme. One can buy closed-end funds, which generally have a tenure of 3 – 5 years only during the offer period. On the other hand, an investor can purchase units of an open-ended fund anytime.
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How is an equity IPO different from an NPO?
There are two crucial differences between an Initial Public Offering (IPO) and an NFO. When a company seeks capital, it often issues IPOs. An NFO from a fund house just pools in money from investors and invests that in a set of securities, based on its agreed strategy. IPOs are priced at a premium to the face value, but an NFO is always available at Rs. 10 per unit.
Is there any advantage to putting money in an NFO?
Many investors gravitate towards NFOs primarily because its net-asset value (NAV) is priced at Rs. 10 per unit, compared to open-end schemes with higher NAVs. Wealth managers often advise against this. In an NFO, one is in the dark about several things like what the portfolio will look like and how much assets the fund will gather. It’s better to stick to open-ended schemes from Mutual Fund houses with a good track record. Investors should invest in an NFO only if it has something different to offer from the existing fund’s universe or something which cannot be achieved through an open-ended fund.
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Divided House:
The opinion is divided when it comes to investing in Mutual Funds via NFOs. Financial experts are of the opinion that NFOs are marketing devices and they’re used by Asset Management Companies (AMCs) to push their assets under management. The price of a stock is based on the demand and supply of it. Mutual Fund units on the other hand, have an endless supply. For most equity fund investors, a fund that has been through various market cycles and is helmed by an experienced fund manager would be best equipped to take advantage of any bull run and protect one’s investments during the bull phase.
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While evaluating if a scheme is good or not, regardless of whether it is an NFO or something else, we are trying to determine whether the scheme will deliver returns that are competitive in its category of funds and commensurate with the risk it takes. During this evaluation, we also try to determine if the scheme is suitable for our needs and whether it fits into our portfolio. This evaluation becomes difficult in the case of NFOs as they have no track record given that they are yet to commence operations.
Besides what the prospectus spells out, there is no way of knowing what the investment style of the scheme would be and whether the strategy of the fund manager would work successfully in the market.
Final thoughts:
Also, most often, it is quite likely that there already are several schemes in the market that have an investment profile or mandate similar to the NFO. These existing funds would have a track record that would allow one to evaluate them objectively. One should consider NFOs only if there is a new type of fund that fills a gap in an investor’s portfolio. For instance, if a new fund is investing in a country or area where there are no good funds, and if such a fund would fit into an investor’s portfolio.
However, one shouldn’t completely shun all funds’ NFOs. One should look at the pedigree of the fund house before investing.
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