What is better investment, NFO or existing funds?
Whenever a New Fund Offer (NFO) is about to get launched by a mutual fund house, there is quite a buzz about it everywhere in the market. There are lots of advertisem*nts -- be it Fund Manager interviews, articles in newspapers or advertisem*nts on TV. The simple reason of creating buzz is to make investors aware of the NFO being offered. Is Investing in New Fund Offers better than investing in existing mutual fund schemes? Lots of confusion! Before we get into this, let us first understand what is an NFO?
What is an NFO?
Asset Management Companies launch New Fund Offers providing new investment opportunities to investors or to benefit investors from upcoming market opportunity. New Fund Offer or shortly NFO is a new mutual fund scheme being launched for the public in the financial markets. In other words, a new mutual fund scheme with a new investment strategy is offered to investors for the first time. Asset management companies (AMCs) could also offer NFOs as new mutual fund products which were not previously there in the asset basket.
According to the SEBI regulations, a New Fund Offer can be opened for a maximum of 30 days.
NFOs can be of two types -- close-ended and open-ended mutual fund schemes
Close-ended funds-Investors can invest only during the subscription period and cannot invest more once the subscription period is over. They are also required to stay invested in close ended funds until the maturity period or the lock in period.
Let us take an example of an investor say, Mr. P who has subscribed to Y mutual fund to procure 150 units at ₹ 10 each. When this NFO started trading in the market, if the NAV becomes ₹13, his portfolio’s value becomes ₹ 1950. If in future Mr. P decides to sell his units when investors are willing to pay ₹ 15 then in that case Y mutual fund is trading at premium. Conversely if each unit is traded at ₹ 8 then Y is being traded at discount incurring a notional loss for Mr. P.
Open-ended funds-Open ended scheme permits investors to invest in the scheme even before its NAV is calculated. The number of respective fund’s units keep fluctuating with the demand. Let us take another example to understand open ended scheme. There is an investor say ‘Q’ who has invested in mutual fund ‘R’ during NFOs. He has invested ₹ 500 to procure 50 units. As the fund get activated, NAV stands at ₹20 per unit which means any further purchase of units will be at ₹20. If Mr. Q decided to sell his units of the mutual fund, he is supposed to receive ₹1,000 (50 multiply by 20).
Why you should invest in NFOs rather than investing in existing fund?
Exploring a new fund: NFOs encourage investors to invest in new strategies which were not explored earlier. It could be in the form of an exposure to a new asset class/index/commodity which you may not get in the existing open-ended funds. There could be more innovative and profitable schemes which NFOs have to offer. Therefore, by investing in New Fund Offer, you can get a first mover advantage in financial markets.
Diversifying the Portfolio: When frequent market swings can cause investors’ portfolio to get concentrated in a particular asset class, then investors can choose NFOs to diversify their asset allocations but making sure that the overall portfolio risk does not go beyond limits.
Offer Price is attractive: NFOs mostly come at an attractive price of ₹10 per unit. It is advisable that investors take this opportunity in order to execute it at this affordable price. In case of a delay in NFO investment decision, you may end up investing at a relatively higher NAV in the same scheme after the closure of NFO period.
Advantage of lock in period: Close ended NFOs mitigate the panic sentiments of investors and help them get good returns as their funds get locked till maturity. It also gives time to fund managers to track assets in a more systematic manner without worrying about early redemption by the investors.
Availability of information: Scheme Information Document (SID) provides all the details regarding the NFOs. It contains information regarding investment objectives, goals of NFO, etc., It gives thorough understanding of the scheme being offered. It can surely help investors in making informed decision.
Above mentioned features make NFOs more preferred option than existing funds but before investing one should be mindful of the below mentioned points.
The Reputation of the Asset Management Company: The history of an asset management company has a direct influence on the future of the NFOs being launched. Whenever a mutual fund house issues New Fund Offer, investors are required to do a thorough fact check of the portfolio managers in order to understand if the mutual fund is actively managed.
Read the offer documents thoroughly: It is of utmost importance to read all the documents associated with NFOs properly. As per SEBI directives, Mutual fund houses, through relevant documents, are supposed to clearly explain all the information regarding NFOs to the investors. By going through the offer documents investors can understand the risk, diversification, investment objective, exit load, etc., of the fund. To put it simply, reading the offer document should make you understand what the AMC will do with your money.
Investment theme: It is advisable to know the underlying theme of a NFOs because market is being flooded by NFOs regularly. You should see whether there is something innovative in the new scheme or it is just the repetition of existing investment schemes. In case you find out that the New Fund Offer is almost same as current scheme then you should reconsider your decision to invest.
Risk factor: NFOs do not have a past performance history and could be less reliable than existing funds. NFO, as the name suggests is a New Fund Offer which means newly launched fund. Investors are not aware about their performance nor can they predict accurately how this fund is going to fare in the market. Investors who are risk averse should choose NFOs which are investing only in debt funds or blue-chip companies.
Investment cost: The expense ratio is another important factor that should be kept in mind before investing in the NFOs. Expense ratio is nothing, but the amount charged annually by fund house to manage your portfolio. It is suggested to enquire if the expense ratio is higher or lower than what SEBI requires.
Investment Horizon: NFOs which are close-ended require to lock-in your money for a time frame of 3 to 5 years. This means that after subscription, you may not be able to redeem before maturity date. You might encounter a pre exit fee if redeeming early. Investors are advised to do a complete check of their investment goals to make sure that the NFO they are planning to invest is as per their objective.
Conclusion: Investing in New Fund Offer has many advantages if you have researched about the NFO thoroughly. In order to reap the benefits of NFOs, investors must have comprehensive knowledge related to the NFOs. NFOs have gained popularity over the years in numbers as well as in size. There are different kinds of funds available in the market but identifying and picking an NFO that offers something innovative can be tricky yet beneficial. In is always advisable to read the product related documents, terms and conditions well before starting to invest in NFOs.
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