A new fund offer (NFO) is the first offer given by a company to purchase a new fund. By launching NFO, the company attempts to raise its capital. Mutual funds are one of the most common types of new fund offerings by the companies.
As NFOs are newly launched funds, so they are aggressively marketed by the companies to raise their capital as soon as possible. NFO’s are often launched during the times when the market is growing well.
Top reasons why you must avoid NFOs
You must prevent NFOs due to the following reasons:
- Unproven track record: As NFO’s are newly launched funds, so it is tough to predict their performance in the future with no record to analyse and prove the same. It is highly risky to invest in NFOs for this very reason. If you search the market well, you may come across with similar mutual funds which have been rated or critically reviewed by the stock analysts. It is much safer to go ahead with those funds with appropriate ratings.
- As costly as other funds: As an investor, you may think that investing in NFO is much cheaper as it is a new fund so must have been released at a lower price. But, it is indeed not so! NFOs are available for a face value of Rs. 10/unit which does not mean that you are buying cheap. The existing MF’s will usually have a higher NAV vis-à-vis a newly launched NFO. So, you must look at the percentage growth of NAV rather than looking at the value of NAV itself.
- High initial prices: NFOs being new have to be aggressively marketed to get noticed. There is a lot of expense incurred in marketing NFOs. How do you think these expenses are adjusted? Of course, these expenses are aligned against the returns that you get as NAV. So, you end up fetching lesser returns in NFOs than otherwise.
- NFO’s are mistaken to be equivalent to IPO’s: In IPO’s, the companies issue fund to build capital for its growth. But, NFO’s are usually launched to build capital which is used to invest further in securities. This is why IPOs are always priced at a premium price, but the NFOs are available at Rs 10/unit.
- NFO’s offer fewer diversification options: Generally, the mutual funds are opted for their diversification which reduces risk. But, NFOs are launched in a specific sector, or they target a particular category such as a small cap or mid-cap funds. So, this minimizes your chances as an investor to diversify which is highly risky.
These were some of the reasons which insist that you must not invest in NFOs. If you still want to invest in them, then you must keep the following points in mind:
• Invest only if you can tolerate a high amount of risks.
• Invest only a small portion of your investment value in them.
• Invest only after checking the past performance of the AMC suggesting NFO funds.