Should You Be Investing In Mutual Funds via NFOs?

Of late, there have been ads of some new mutual fund offering via new fund offers (NFOs), that may have caught your attention.

NFOs, which are generally open for subscription for 15 days, is a first-time subscription offer for a new scheme launched by asset management companies.

Similar to IPOs (Initial Public Offerings), these are launched in the market to raise funds from the public at a fixed offer price so as to generate initial capital to build a diversified portfolio for the mutual fund.

Once the window of an NFO closes, these will be available for a regular subscription like any other open-ended mutual fund scheme.

NFOs currently open for subscription:

Name of the mutual fund scheme	NFO closing date
Nippon India Nifty Smallcap 250 Index Fund	Friday, October 09, 2020
ICICI Prudential ESG Fund	Monday, October 12, 2020
Principal Large Cap Fund	Monday, October 05, 2020

Points to consider before you invest in an NFO

Strategy

The new scheme will spell out its mandate- that is how and where it will allocate its money. You can do some research and reading on the offer.

The category of assets or theme it invests in will be a defining factor in its ability to provide higher returns or at least decent returns.

For example, a large-cap mutual fund is considered less risky than the small-cap category, however, small caps hold the possibility of high returns.

As an investor, you must ascertain if the scheme mandate suits their own risk profile and goals.

Timing

AMCs launch a new scheme to widen their product base or a particular scheme may be launched when a particular theme becomes popular in the market.

While the theme or sector may be doing good at the launch of the NFO, as an investor, you may want to look at the long-term sustenance of good returns on the scheme.

At present, the market is highly volatile and is likely to stay volatile as investors await the outcome of the US Presidential elections and the progress in combating COVID-19 globally. There are chances that the mutual fund schemes recently launched or to be launched may yield good results ( based on the category of assets they are invested in) because the managers can take advantage of the present volatility to structure a portfolio that will do well when the markets recover.

Unlike an existing mutual fund scheme which is mandated to stay fully invested, a fund manager in a new scheme may be able to play with the current volatility to the scheme's advantage.

Therefore, the timing of the launch plays is important as yields will vary based on when you enter a scheme.

Review

When you go shopping online, it is most likely that you read reviews on the product before you make a purchase. In case of a mutual fund scheme, the track record on returns generated by the scheme in the past few years could be an equivalent of a product review. It helps you gain some insight into the fund manager's performance and compare the returns with that of a benchmark index like Sensex.

The primary reason to invest in mutual funds over self-investment is that these schemes are managed by experts who actively manage the flow of money. The only practical way to measure a scheme's performance with another would be comparing returns from the scheme with another scheme, if not an over-all market index.

With an NFO, you do not have the option to trace the footprint of the scheme. You might have to rely on the track record of other schemes provided by the AMC, which basically means you have to rely on the fund house's overall performance and reputation.

If the AMC is a new player, you can only wait to see how it manages to establish its credentials.

Should you invest in NFOs?

The decision to invest will include factors beyond those already mentioned. You may want to consider a new scheme if you think that the theme will help in your investment portfolio and if such a scheme is not currently available in the open market with another fund house. Consider schemes which may have something different to offer or from a fund house that has an established track record.

It is also advised not to start a SIP (Systematic Investment Plan) with an NFO. You may want to wait and see if the mutual fund scheme is being executed well before you decide on a long term commitment like a SIP.

Disclaimer

The article is informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.