Pros and Cons of Investing in NFO – Is It Good to Invest in New Mutual Funds?
What are the Advantages and Disadvantages of NFO
In this article, we are going to discuss NFO with its advantages and disadvantages. So let’s begin with NFO understanding first. Any asset management company that launches a new mutual fund scheme in the market to raise capital refers to NFO (i.e. New fund offers).
It’s very much similar to IPO when a company wants to raise capital & take a route via IPO wherein companies shared are to be purchased for the first time.
NFO gets launch to buy securities like shares, govt. bonds etc. from the market.
An investor can apply for an NFO only for a limited time period. Therefore, NFOs are functional on a first-come-first-serve basis. Investors can purchase an NFO unit of the mutual fund scheme at an introductory price. This price is fixed at Rs. 10 per unit. Once the stipulated time period completes. Thereafter, the units of the fund can be purchased at an offer prevailing at that point in time.
As per regulatory body SEBI, an NFO can be active for the first 30 days from the launch date. The offer price to subscribe is Rs.10 only. Once the new fund offer closes,
the collected amount will be utilized in buying securities of different publicly traded companies depending upon the scope of the fund.
Post closure any trade of the respective mutual fund has to be done on NAV.
It’s a very profitable deal for investors as they get access to respective units at a very nominal cost of Rs.10.
Therefore, the realization of the profits at a later date will be huge.
Let’s dive into the advantages and disadvantages which NFO offers:
Definitely, an investment in NFO has advantages for investors in different aspects.
Opportunity to Invest in a New scheme: As an investor, you get an opportunity to invest in a new fund that is launched to meet the specific requirements of a particular set of investors.
No large flows: Investors can only invest in closed-ended funds via NFO. As a result, fund managers can select a good amount of securities as per the objective of the scheme.
In addition, they can monitor and track the funds,
if it’s not on track then can strategize accordingly to meet the ends.
Flexibility: There is a great deal of flexibility in investing your money in the market. As NFO offers flexibility to fund managers to time the investment amount with the timing of the market. In case the market is not performing well at the time of NFO launch.
Certainly, the fund manager can hold the fund to invest at a later time when the market is right to invest.
Expert Knowledge: As an investor, you should remain invested in the funds rather than timing the market as for that purpose you have invested in NFO. So that worries can be looked after by your fund manager. Fund managers are experts in this field hence they are managing the funds on behalf of investors.
Lock-in supports: As discussed above only closed-ended funds can be launched via NFO hence is there will be min lock-in period for the investors to remain invested. Inequity markets, due to panics & manics investors pull out the money once the market goes bearish.
Therefore, the lock-in period helps to churn out better returns when your fund gets through the up and downs of the market.
No Track Record: As NFO gets launches for the first time hence there are no track records for the return that one may compare before investing.
As an investor, you should read the terms and conditions listed in the prospectus to understand the scope of the fund.
Higher expenses: When an AMC launches a new fund to raise money, they spend a huge amount in marketing their fund.
As a result, the commission that AMC pays to their intermediaries for getting their NFO sold will be passed onto investors. To sum up, this cost is referred to as the expense ratio which ultimately gets paid by the investor’s money.
Low degree of diversification: Generally AMC has nothing new to offers so they re-bundle the existing portfolios and relaunches it a new name as NFO.
You may find a similar fund with peer AMC with the same shareholding. It’s just like baking the same cake again and again.
NFOs are not like IPOs: As there is no benefit of investing in the NFO period.
Generally, people look at NFOs the way they look at IPOs. They believe they will get benefitted if the demand for funds increases similar to the stock market. But this is just a myth.
That’s because a mutual fund’s NAV doesn’t get affected by demand and supply.
And I tell you why this remains unaffected as the number of units available in case of a stock is limited,
so their price goes up if there is more demand. On the other hand, if there is no limit to how many units a mutual fund can have. Units get created as and when required.