Jan 15, 2018 4 min read

What Is NFO? Know the Merits and Demerits of Investing in NFOs

Are you confused whether you should choose an NFO or not? Know this.
Hello Investors! These days, the query for NFOs have been heard many times. Our existing clients and other visitors also have put up questions related to NFOs. So, we brought you this write-up explaining the concept of NFO and the advantages & disadvantages of investing in them. Let’s directly jump into the topic without wasting much of your time!

What Is NFO?

A New Fund Offer (NFO) is an offer made by an investment company for subscription for the first time. In more easy words, a fresh new mutual fund scheme launched in the market can be termed as NFO. Yes, it’s not that much critical as you think. An NFO is also a mutual fund scheme, but the difference is that at the time of the second subscription, it stays no newer.

However, the initial purchasing offer for a new fund varies depending upon the structuring of the scheme.

Should I Invest in NFOs?

To land upon a decision that investment in NFOs is a good call or not, we have to know the various aspects of them. So, let’s unbox the New Fund Offer to understand its ebbs and flows:

New Fund Offers (NFO) are generally launched when the investors are in the buying mood and the market is rich. The fund managers come up with new offerings in the market to attract the positive sentiments of the investors. In the rich market flow, it becomes easier for the fund managers to fascinate the interest of the investors. In the whole hustle and bustle, what attracts the investors most is the ten rupee concept. Now, what’s that? Let’s understand!

The Rs. 10 Attraction: The new fund offers are generally launched at a price of Rs. 10 per unit. Most of the investors subscribe to these new offers just because their price is as low as Rs. 10 per unit, and they can acquire a larger number of units compared to investing in an already existing mutual fund whose price is more than Rs. 10 per unit. However, it is a good thing but may not make all the difference in your portfolio as per your requirements. So, if you are subscribing to any NFOs just because their prices are low, then it may not work this time. Rather, you must invest in them after knowing about their pros & cons and future aspects in detail. We are in no sense committing that one should not invest in NFOs but, there are some perspectives on every move you make.

On the other hand, some of the people think completely opposite to the theory mentioned above. The ten rupee thing doesn’t attract them at all. They are the ones who believe that investing in the funds having higher NAV is beneficial. They connect the value of the fund, i.e., NAV, with the value of the underlying securities. They think a lower NAV fund depicts that it holds the poor quality and low valued stocks. Thus, they do not like the NFO trend so much. It is completely a wrong concept! If you too think this way, then change your concept about this. Let’s take a quick glance to understand the correct concept of it!

Do you know stock trading? Well, at least you might be knowing something about it. In stocks, the book value represents the intrinsic value, while the market value represents the perception of the investors. Similarly, in mutual funds, the NAV represents the value of total assets held by the scheme after considering all the expenses. So, a higher NAV of a mutual fund scheme represents nothing but the value of total assets held by the scheme. Thus, you should not misunderstand the Rs. 10 value of an NFO as the weight market value of its holdings.

Let’s deep dive into the various factors which may help you in deciding whether to invest in or not in the New Fund Offers:

  1. They Bake the Same Cake Again & Again: The asset management companies generally don’t have completely new things to offer. Like in the music industry, they re-mix the same music again and relaunches it as a new version. Similarly, the AMCs re-bundle the existing portfolios and launch them with new names as NFOs in the market. You can find that many holdings of schemes of similar categories highly overlap. However, SEBI has put a full stop to this and ordered the AMCs to come up with NFOs only if they have something completely new to offer.
  2. No Track Record: Most of us believe in something only after knowing its historical impressions and so does we do in investing. We typically tend to flow our money into the scheme which has performed amazingly in the past. But, how will one bets on the scheme which has no track record as such? It will be like a blind betting if you select an NFO. Because you have no idea about the strengths and weaknesses of the scheme, and how it can perform in different market conditions. It needs a detailed analysis to bet on a better fortune. Thus, it cannot be considered as every retail investor’s cup of tea.

Still, if any retail investor is investing in NFO, it would be like shooting in the dark. You never know where the bullet will aim. However, there is no doubt that your blind bet can be extremely successful, but the risk of failure is also extremely high.

So, it’s your call now, if you want to invest in NFOs or not. We only suggest you to take help from the expert for selecting the better one. Moreover, if you feel that you should invest in existing mutual fund scheme, just start right away at this portal, i.e., MySIPonline. We have schemes of all the top AMCs in India.

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