The increasing participation of retail investors in equity markets and the current bull market has spurred the launch of numerous mutual fund schemes in India in recent years. Whenever a fund house proposes its New Fund Offer or NFO, it creates a buzz in the market and opens up a new investment avenue that offers potential high returns for investors. Fund managers hold forth about the benefits of investing in NFOs and newspapers and financial websites publish articles about NFOs. While all this can be tempting, investors would do well to take a step back and observe before investing in such newly launched funds. Let’s dig in to understand more about this popular financial product.
What is NFO?
NFO, short for New Fund Offer, refers to the launch of a new mutual fund scheme by a fund house or asset management company (AMC). Essentially, the fund house offers investors the opportunity to buy the units of the new scheme. The fund company offers units of the new scheme to the public at a cheap rate, starting from Rs.10, before it starts trading in the market. NFOs come with a limited-period offer, typically ranging from a few days to 15 days, as per the mutual fund regulations of India.
During this initial period, investors buy units of the mutual scheme. NFO is therefore a strategic way for fund companies to raise money for their product before launching them in the market.
Due to this feature, you may confuse NFOs with IPOs, but they are not the same. In IPOs, you get clear information about the company’s growth and finances. In an NFO, the fund does not own any stocks and the investor has no way of knowing the actual worth of stocks, unlike in an IPO.
Therefore, before diving into this new investment, you should know if NFO is good or bad for you. A thorough understanding of NFO’s advantages and disadvantages will help you make an informed decision.
Pros of investing in NFOs
Is it good to invest in NFO or not, depends entirely on your personal choice and risk-taking ability. Let us learn about the advantages and disadvantages of NFOs before investing.
Fresh Investment Theme
A new NFO from a mutual fund house offers investors the opportunity to make profits. It enables investors to partake in innovative and novel investment strategies.
Companies typically launch NFOs to capitalize on emerging market trends through their fresh investment themes. Therefore, investors here get a comparatively lucrative investment offer, being the first ones to invest.
NFOs based on niche emerging sectors such as renewable energy and AI provide investors the opportunity to be part of a lucrative market in the future. Therefore, if you believe in the potential of the new trends, buying NFOs can get you early access to high-growth opportunities before they go mainstream.
Lower Initial Costs
The initial cost of buying NFO subscriptions is usually very low. Usually, NFOs start from Rs. 10 during the subscription period which is comparatively cheaper than other mutual fund shares. This makes NFOs a lucrative choice for investors as they can buy a considerable number of units at a relatively lower cost.
The low entry barrier encourages investors to buy into NFOs. If the funds perform well once they are out in the market as shares, investors stand the chance to make significant capital gains.
AMCs and fund houses strategically keep the subscription amount lower with the chance of investing at a lower NAV (Net Asset Value) to attract more initial investors. This benefits the price-sensitive investors who are looking for a desirable number of shares with minimum investment expenses.
Potential for Early Gains
If the funds perform well, early investors of the NFO get to make a handsome profit as their early gains. If the NFO funds start performing well immediately after the market launch, initial investors gain from the increasing share prices. They can utilize that early gain to invest in more shares of that company before the scheme goes mainstream.
Investing in the NFOs of sectors that have the potential for growth in the near future thus can immensely benefit you financially. It is therefore appealing to invest in NFOs if the mutual fund scheme deals with a potential high-growth sector or has a strategy that complements the current market trends.
Manager Expertise
Reputed and well-established fund houses hire experienced managers to run their NFOs. Enamored by the popularity and investment convictions of these professionals, investors buy into the NFO.
Fund managers with diverse experience and a good track record can craft and implement strategies that align with the company’s fund investment objectives. The expertise of such talented managers can also prove to be a significant advantage for investors to understand the market condition through their expert navigation. Therefore, the presence of expert managers is a great advantage of NFOs.
However, irrespective of the above advantages, financial experts often advise investors to think twice before investing in NFOs. Any discussion on whether NFO is good or bad is incomplete without an understanding of its disadvantages.
Cons of investing in NFOs
Now that you know the pros of the new NFO mutual fund, it is time to discuss some of its downsides to help you finetune your move. Here are some disadvantages of NFO investments that you must know.
Lack of Track Record
The first and foremost disadvantage of new NFO mutual fund investment is its lack of historical track record. Being a new scheme in the market, NFOs do not have past performance data for you to analyze its trends and prospects. In traditional funds, you get to analyze your chances of making a profit and invest rationally.
Without a proper track record, investors of NFOs have to depend on the prospectus of the funds and above all, the credibility of the fund management team. However, these alone will not give you an indication of the fund’s future performance. Therefore, investing in NFOs is highly risky as it lacks proper information to guide you.
Uncertain Performance
The performance of NFO is uncertain as it is new to the market. Its resilience across different market cycles is yet to be tested. Therefore, it becomes difficult for investors to predict how the funds will perform under various market conditions or when the market fluctuates. This uncertainty of performance becomes a crucial negative aspect of NFOs.
Therefore, you need to be prepared to deal with the risks if the funds do not perform as you had expected. Refrain from buying NFOs without properly assessing the favorability of the fund in the market.
Limited Information
Unlike existing mutual funds, NFOs do not have historical data for you to analyze, especially during the subscription period. The lack of information is a great disadvantage for investors who often find it challenging to assess the potential of the fund in the future.
Without conclusive information, investors would need to depend on marketing materials and manager’s expertise to invest in NFOs. Thus, there are risks involved in investing in such low-clarity investments.
No Immediate Liquidity
You cannot trade or exchange your NFO stocks until it is open in the market through listing. This lack of immediate liquidity is a setback for many investors who want to buy and sell their units regularly on the stock exchange.
Therefore, NFO is not a good choice for investors who want flexibility in their entry and exit options. The lock-in period of NFOs can differ according to the fund house’s policy which can work to your disadvantage if the market conditions change during the period.
Possibility of Overpricing
During the subscription period of NFOs, you purchase units at their face value. However, once the NFO sets out in the open market, the variable market forces determine its price. You could face potential overpricing if the market price is higher than the intrinsic asset value.
Though the initial offer price of NFOs is cheaper than regular mutual funds, the rise in prices after market listing makes them undesirable. Investors thus need to be cautious about the prospects of overpricing of NFOs before investing.
Conclusion
The answer to the question of whether NFO is good or bad depends on your financial goals and risk appetite. If you want to diversify your investments and explore new opportunities in a fresh fund, then your NFO investment can be worthy. However, the lack of past performance metrics, uncertainty of the lock-in period, and the risk of overpricing make NFOs risky. Therefore, assess carefully and decide whether it is good to invest in NFO.
