Since the stock markets are doing well, it is not just IPOs (Initial Public Offer) that are flooding the markets. Mutual fund houses are launching new fund offers (NFOs) as well to capture investor’s attention. NFOs are nothing but new schemes launched by mutual fund companies to expand their business. During the NFO subscription period, an investor can buy the mutual fund units at a fixed rate of Rs.10. After the NFP window closes, the fund units are available for subscription as open-ended funds. The question is should you consider putting in money in an NFO? Are they risky? Let us examine:
No proven track record: A mutual fund existing for a few years can be researched based on the past performance, fund manager style, portfolio composition, consistent investment strategy, volatility, how it behaved during downfalls and other qualitative & quantitative parameters. It is very difficult to analyse a new fund since it has no history or track record.
Higher Costs: Costs matter a lot in mutual funds and they can eat into an investor returns if they are too high. The initial expenses and marketing charges are high in case of NFOs as they start with a small corpus. The costs come down only later as the asset base expands.
Suitable mandate: Mutual fund companies launch different types of NFOs to expand their assets under management (AuM) and complete their product basket. This does not imply that every NFO spelling out their specific investment objective would suit your risk profile and financial goals. Further, it would be prudent to consider other existing funds with similar mandates rather than investing in an NFO.
Inappropriate NAV comparison with peer funds: Many investors breed the wrong notion that NFOs work just like IPOs. They compare NAVs (Net Asset Value) of peer funds and conclude that NFOs are cheaper than the already existing funds as they are available at Rs.10. What investors are not aware is that in IPOs, the listing price depends upon demand and supply of shares by market. In NFO, it is not the case. The growth in NAV of the fund depends upon the growth of underlying securities. The percentage of growth is important rather than the value of the fund. Hence, in case of NFOs, investing in a fund which has a lower NAV vis-à-vis peers has no relevance.
Final Word:
Rather a new mutual fund scheme, it is advisable to go with existing schemes that already have a proven track record and suit your risk profile and goals. The NAV of the fund at the time of NFO has no bearing on your returns. Whether the NAV is at Rs.10 or Rs.1,000 a quality fund with good track record and consistency is worth investing in.