NFO – Important Points to consider before investing in NFO

In Stock Market | Last Updated October 16, 2017|3 Comments

New Fund Offer (NFO) is well-known term. NFO means the first subscription offer given by fund house for the mutual fund. You might have come across news related to New fund offer launch in the past few months. You might be thinking to invest in one of them. If that is the case, here are some important points to consider before investing in NFO.

What is NFO?

A new fund offer is new subscription offer for the new scheme launched by the fund house. NFO is a way to raise the money from the general public by the fund house. This money is used for investment in stock, bonds, treasury etc. NFO is offered for the limited period of time. A value of New fund offer is generally kept at Rs.10. Once the NFO period is over it will be launched as a mutual fund. One can invest in the mutual fund at NAV price.

Important Points to Consider before Investing in NFO

If you are planning to make investment in NFO you should consider following points.

Investment Theme –

The first point is Investment Theme. This means where fund house is planning to invest money. Their investment theme (small cap, mid cap, large cap, balance etc.) should match with your objective.

In addition to this if fund house has unique investment strategy you can take a look at that. Examples are Pine Bridge India US Equity Fund, Motilal Oswal NASDAQ 100 ETF etc.

Background of Fund House

It is very important to take a look at the background of Fund House before investing in NFO. You can take a look at past performance of fund manager. It is also important to check the credibility of fund house before investment. The qualification and experience of the fund manager play a vital role in the fund’s performance.

Fund Class & Type

Every Fund has a type and class. Funds are Growth, Dividend, Direct, Short Term, Long Term, FMP, Debt Type. You should take a look at fund type before investing. The fund type should match with your risk-return profile.

Cost

Cost or expense is another important factor of consideration. This includes initial fund issue expense, load, advertisement cost etc. If expense is high from the beginning returns will be affected for sure. You can even look at actual expense or expense by other similar schemes in the past.

Entry Load, Exit Load and Other Factor

You should also take a look at entry load and exit load of the fund. Additionally, you can check minimum investment required for the fund.

Why should you stay away from NFO?

Truly speaking investor should stay away from New Fund offer unless and until unique proposition is found in fund offer. Several reasons for not investing in NFO are given below.

NFO

No Performance History –

As it is new fund offer you cannot find detail about past performance. In absence of performance history, one cannot perform a quantitative or qualitative analysis.

High Initial Expenses –

The initial expenses on marketing of fund and launch are manage out of NAV of fund over the period. This clearly means that return on new fund will be affected.

Not cheaper than other Peers –

It is a myth that new fund offer means fund available at cheaper rate. The fund is launched with a value of Rs.10 only. The fund collected from investors is used for investing in equity and based on the performance of equity NAV will be declared.

Diversification is Limited –

The New fund offer limited or less diversification. These are focused fund mid cap, large cap or small cap. As fund offer limited diversification it is risky to invest in the fund.

NFO is not IPO –

Please understand that NFO and IPO both are different. In NFO initial NAV is fixed at Rs.10. While in IPO stock price is fixed based on demand and several other factors.  NFO make an investment in multiple shares. So, NAV and returns depend upon the growth of multiple underlying securities.

Conclusion

It makes sense to avoid New Fund offer and Invest in currently available funds based on investment profile, fund analysis, and other factors.

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