Investing in New Fund Offers or NFOs of Mutual Funds is a global practice: India is no different. Usually, the prospect of paying only Rs.10 per unit could have attracted you and several others to invest in NFO.
But the question is: Are NFOs worth your investment? Do they really offer value for money by providing high returns compared to existing, established Mutual Funds?
There are no clear answers to this question. Therefore, we will discuss about investing in New Fund Offers and its pros and cons.
What is NFO?
Many people confuse between NFO (New Fund Offers) and IPO (Initial Public Offering) of stocks. Indeed, the two differ a lot.
- Units you buy from an NFO have no real value; they derive value from equities, bonds, derivatives, and other money market instruments.
- Stocks from an IPO have their own value. They signify your shareholding in a company.
- NFOs are launched by Asset Management Companies (AMCs) for various reasons. These include the creation of new schemes to invest under a particular theme or sector of the industry, topping up existing top Mutual Funds by raising money for investments, or creating short and mid-term income opportunities for investors.
- NFOs are Open Ended or Close Ended. Open-ended Mutual Funds mean the AMC or Funds Manager can buy and sell various stocks as an investment strategy. Close-ended funds usually deal in stocks of the same companies they began with.
- NFOs are usually open for a fortnight to three weeks, during which you can buy units at Rs.10 each. After that, they reappear as Mutual Funds open for subscriptions.
Categories of NFOs
Broadly speaking, you can buy NFOs in two categories as and when they are announced:
- Mutual Fund NFOs: These can be bought by any investor with a minimum of Rs.500 onwards, depending upon the AMC and NFO offer.
- Exchange Traded Funds: Also known as ETFs, these are Mutual Funds that trade daily on the stock market. Anyone with a minimum of Rs.5,000 can invest in ETFs. But you require a Demat and Trading account to buy or sell ETF NFOs. Usually, they are on offer for a day or two only.
NFO or Not?
Whether or not to invest in NFO mutual fund is purely your decision. Some Mutual Fund investors prefer buying during NFO only since they can get more units for a smaller price.
Others advise against investing in NFOs. Both these investors are correct, depending upon which standpoint you look from.
Therefore, we have a quick glance at the Pros and Cons of NFOs.
NFO: Advantages and Disadvantages
Pros of NFO
New Fund Offers, or NFOs, are generally launched by an AMC as a continuation of its popular series or to introduce a newly themed best Mutual Fund. Therefore, they come with the following benefits.
- Provides an opportunity to invest with a small budget in a theme such as tax savings or a specific industry sector when prices of existing Mutual Fund units are higher.
- NFOs are ideal if you stay invested for a long time in a particular type of Mutual Fund. Hence, they are best suited for long-term investors.
- If you believe that a particular industry or sector will witness a boom in the future and some AMC launches that specific NFO, it provides you with an investment opportunity.
- You can get a larger number of units through an NFO than by buying the same later as a lump sum or through Systematic Investment Plans (SIPs).
- Generally, prices of units bought during NFO are bound to rise at least marginally. They can slump a bit during stock market downturns.
Refer: 15 Best Trading Apps in India to Buy NFO, SIPs, Stocks & more
Cons of NFOs
NFOs come with their fair share of problems you may be unaware of when investing. Here are some disadvantages of investing in NFOs.
- Usually, AMCs charge an ‘exit load’ when you redeem Mutual Fund investment units bought during an NFO. Exit load is not applicable only if the NFO is a continuation of a series of Mutual Funds. This exit load can be as high as three percent of your Net Asset Value at the time of redemption.
- Generally, most NFOs come with a lock-in period. Meaning you cannot redeem their units before six months to a year.
- There are no guarantees that an NFO will develop into a profit-making Mutual Fund. There are no records to prove its performance.
- NFOs are not rated by the credit rankings agency CRISIL. Hence, how the AMC and that particular fund manager handle the Mutual Fund is anybody’s guess.
- Large financial scams can send the prices of Mutual Funds you bought as NFO into a tailspin. If the NFO has equities in the scam-tainted fund, it might take years to recover from the initial value of Rs. 10 per unit.
Generally, NFOs operating as Fixed Term Plans (FTPs) are safer. You can buy NFOs that have short, medium, or long fixed durations.
AMCs try and ensure that FTPs do not run into massive losses. They are quick to turn around any losses quickly to ensure that investors do not lose confidence.
Also, investing in NFOs that are continuum of existing series is a good idea. This way, you can judge how earlier issues of the series are faring by knowing their Net Asset Values (NAVs). Exit Loads are also not applicable to existing series.
Often, AMCs also allow you the facility to invest in NFOs through Systematic Investment Plans. This means you can take a fixed value worth of units when the NFO is open for subscriptions. And later, you get additional units when it opens as Mutual Fund for fresh subscribers.
As I mention earlier. To invest or not in NFOs is purely your decision. People subscribe to NFOs. That is why we have more than 3,000 types of Mutual Funds – Equity. Hybrid, Debt, and Liquid in the financial market.
Additionally, some NFOs can also help you save on Income Tax. Generally, many Tax Saver schemes appear in India just before the end of a financial year in the months of February and March. In conclusion, I can safely say that NFOs are also ideal ways to invest in Mutual Funds.