Are New Fund Offers (NFOs) worth investing?
Here are a few tips on whether the New Fund Offers (NFOs) are worth investing or not?:
You might have come across a plethora of new fund offer (NFOs) in the past few months. You would even have thought of investing in some of them.
But you might have got puzzled as to which ones are meant for you?
Fret not…it isn’t that perplexing!
You only need to get the basics right and adopt a systematic and analytical approach.
A new fund offer (NFO) relates to a subscription offering of any new scheme introduced by an asset management company (AMC) for the first time.
With the help of the NFO, the AMC aims at raising money from the general public. It plans to invest this money in securities like shares, bonds, treasury bills, etc.
NFOs are offered for a limited period. In most cases, the NFO is available at an offer price of around Rs 10.
It implies that you may invest in these schemes at the offer price within this stipulated period only. Once the NFO period ends, you can take an exposure in these funds just at the current NAV.
IPO vs. NFO: the dissimilarities
Investors often consider investing in an Initial Public Offer (IPO) to be the same as investing in a New Fund Offer (NFO).
And why not! NFO also involves buying a mutual fund before it starts trading at NAV. Add to that the extensive marketing efforts of the fund houses which creates a lot of hype around the NFO.
Investors think that NFO is a cheaper version of an IPO. But it doesn’t necessarily convey that every NFO will be a value proposition.
There might be chances of an NFO being a mere repetition of an already existing product; marketed in a new package.
Thus, as compared to an IPO, an NFO is altogether a different ball game. Investing wrongly may glue you to unwanted products.
At this juncture, you need to understand the differences.
When you invest in an IPO, you own shares of only the single company which is issuing the shares. On the contrary, an NFO provides you access to a basket of securities at the same or even a lower price.
Hence, the decision to invest in an NFO requires much more research and analysis in comparison to an IPO. Before going for an NFO, you need to examine the financial health of all the companies whose stocks are being held in the basket.
Conversely, for an IPO, analysis of the financial health of the issuer company should suffice the decision.
When is the right time to buy NFO?
Ideally, there’s never a right time to buy NFO. There’s a lot of mis-selling involved which markets NFO as a cheaper product than the existing products. But that’s not the case in reality.
NFOs are not cheap. Suppose an NFO is available at Rs 10 and an existing fund is available at an NAV of Rs 20. Although, NFO looks cheaper it need not have the same growth rate as the existing fund.
Hence, buying NFO isn’t recommended unless your investment strategy requires investment in such an avenue.
Things to look for before investing in NFO
NFO represents a great opportunity to find lucrative havens amidst the noise. However, to cut the right deal, you need to look into these critical aspects.
Theme of investment
For investing in an NFO, there needs to be a strong reason. Either it should give you exposure to an unexplored asset class or a unique investment strategy. Otherwise, you would be better off to invest in the existing mutual fund schemes.
ETFs usually use this pitch to draw in investors towards subscriptions. Take the case of Motilal Oswal N-100 ETF which came up with the idea of giving exposure to NASDAQ as the underlying.
Background of the NFO
It would be highly beneficial to carry out a background check before going for the NFO. You may examine past performance of the fund manager. Additionally, you may analyse the history of the asset management company.
Investment Style of the NFO
Every mutual fund scheme operates on one of the three investment styles, i.e. value, growth or blend. Each style has implication on the risk-return profile of the fund.
While going for an NFO, you need to ensure that investment style is explicitly mentioned. There should be no ambiguity as regards the choice of asset classes and asset allocation.
The fund history would give you an idea whether the fund house sticks to its investment style or not.
Cost of NFO
Warren Buffet has rightly opined, “Price is what you pay & value is what you get.”
If something is available for cheap, it need not be valuable. Especially during bull markets, you will find everything expensive.
AMCs consider this as the best time to cash in the opportunity. They tend to launch NFOs which are way cheaper than stocks. The offer price of NFO is far less than the market price of stocks.
Amidst this market exuberance, investors tend to miss out on one thing. Unlike one-time brokerage involved in equities, mutual funds investment involves recurring cost.
It comes by way of expense ratio which the fund house charges annually. Empirically, it has been found that AMCs can reduce expense ratio as the fund size grows.
Before investing in an NFO, examine it from the standpoint of cost. You can review your NFO’s scheme information document. It will give you an outlook whether the AMC has a good track record.
Is it able to bring down expense ratios of its other schemes? It requires a bit of hard work from your end as well. To get the additional help you can contact your adviser. In other cases, you may glance through past fact sheets in case you are going for a direct plan of the NFO.
Actively or passively managed
A fund can be actively or passively managed.
A passively-managed fund tries to imitate the underlying benchmark like a NIFTY or SENSEX. It means the fund never beats the benchmark. The only novelty which an NFO can bring to the table is a lower expense ratio vis-a-vis the existing funds.
As regards active funds, these attempt to beat the benchmark. If an NFO gives you a lower alpha (i.e. the excess return), you are better off with an existing fund.
Seek out an NFO which gives you a higher alpha on a consistent basis.
Investing in an NFO is never regarded as a wise proposition. Unless your investment strategy says so or you are getting exposure to a new asset class, you should never invest in an NFO.