Mutual funds have become more popular with retail investors in the recent past, following their participation in the collections of non-fund operational (NFO) income by the mutual fund houses.
What is a New Fund Offer (NFO)?
New Fund Offers (NFOs) are launching new mutual fund schemes.
Mutual fund houses keep coming up with new products, especially when there is an increased inflow into the equity markets.
In other words, New Fund Offer (NFOs) are mainly launched when the markets have shown good returns in the last six months to 1 year, and they rarely come in bear markets.
In the first quarter of March 2020, hardly any new financial instruments were issued, while equity markets were down more than 25% over the month.
If you want to invest in an NFO, you need to purchase units during its initial offering period.
After the initial offering period ends, you can buy/sell units on any business day from the mutual fund house that manages the scheme.
How Does a New Fund Offer Work?
The investors may purchase the mutual fund scheme units during the pre-defined period and subscribe to the NFO at an offer price, which is usually fixed at ₹10.
Once the tenure expires, the investors can purchase the fund units at the specified price.
NFO subscribers, overall, have been able to generate better gains post-listing.
Because, in the case of an NFO, there are no historical data or performance metrics available for analysis by investors.
They have to rely on data about similar schemes offered by the same AMC or trust houses offering similar schemes.
Open-ended schemes are much more popular than NFOs as they allow investors to enter and exit at any point in time and trade their units on stock exchanges like any other equity share.
NFOs can be invested through SIP (systematic investment plan) or a lump sum amount.
So, it offers convenience and tax benefits through SIPs (under section 80C).
Investors can also choose between dividend and growth plans depending on their requirements and risk appetite.
Only a limited number of new funds are open to the public, so if you have any interest in getting one, we would suggest you apply now.
Things You Need to Ponder While Investing in NFOs
Old Wine in New Bottle
Investors must be aware that various new schemes are launched every year with a slight difference in investment objective than the existing schemes.
It would help if you did not fall prey to such schemes. Such schemes are known as old wine in new bottles, introduced with a slight change in name or investment objective to attract investors.
Every mutual fund scheme has a specific risk factor associated with it.
Investors should understand their risk appetite and then invest in mutual funds accordingly.
If they can’t understand whether the scheme is suitable for them or not, they must seek help from a financial advisor or SEBI registered investment advisor.
Cost of Investment
The cost of an NFO will be high due to all expenses related to marketing and advertising.
The price is high because the AMC will also try to make money from these expenses rather than only from managing an investor’s portfolio assets.
Track Record of Fund House
All the fund houses have different risk and return profiles. Investors should check their track record of the fund house by looking at the past performance of its schemes.
If a fund house has performed well in the equity market for an extended period, then it is considered that it has been able to create wealth for its investors.
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