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NFO or existing mutual fund schemes – Which one is good for me?

02 Sep 2022 0 COMMENT

With the rapid rise in the number of retail investors in the Indian equity markets, public interest in the markets is at an all-time high. Many investors are also choosing to go through the indirect route of making investments, which is through mutual funds. There also exists a lot of ambiguity amongst investors regarding whether to invest in existing mutual fund schemes or in New Fund Offers, also known as NFOs. In this article, we will try to compare whether one should invest in existing mutual funds or apply for NFOs.

Let’s start by defining what is an NFO.

What is an NFO?

An NFO, or a New Fund Offering, is essentially a new mutual fund scheme with a new investment objective which is being offered to investors by an Asset Management Company, or an AMC. An AMC can launch an NFO only if they don’t have any scheme with a similar investment objective. NFOs are of two types, close-ended funds and open-ended funds. Open-ended funds are available to sell and purchase all the time, while closed-ended funds are available to purchase during NFO and can be redeemed only at the maturity of the fund.

According to SEBI, an NFO can stay open for a maximum of 15 days and investors can participate in it during this time. In India, the price is usually set as 10 rupees per unit of the mutual fund. And once the NFO period ends, investors can only buy the units of the scheme at a prevailing NAV for open-ended mutual funds. In the case of closed-ended funds, you can’t buy the units after the closing of the NFO. When it comes to existing mutual funds, one feature which differentiates them from NFOs is that they have an existing track record in the form of performance as compared to a benchmark, returns delivered and the consistency, which a newly offered fund does not have.

Pros and cons of NFOs

One of the biggest pros of New Fund Offers is that they encourage investors to try their hands at new investment strategies and themes which have not been explored previously by the AMC. This may be in the form of gaining exposure in a new asset class, theme, or index which may have not been represented by any of their existing schemes. There is also the likelihood of this new scheme being disruptive in nature and targeting a particular sector which has significantly high growth prospects but hasn’t been discovered by the market yet and can give a first-mover advantage to the investors.

However, one should also give regard to some cons associated with investing in New Fund Offers.

One of the biggest cons associated with New Fund Offers is that they have no proven track record, unlike their existing mutual fund counterparts, who have an entire background history of their performance against benchmark returns over multiple market cycles. Even after reading the supporting documents of the New Fund Offer, one cannot be sure of their future performance as all of it would be prospective in nature. This fact significantly increases the risk factor associated with New Fund Offers.

And this is where the risk appetite of the investor comes in. If the investor believes in the underlying objective of the NFO, which means that if the investor is confident of the theme, sector, or asset class the NFO will be gaining exposure in, then it may be a right choice to go forward.

The reputation of the Asset Management Company also matters significantly here, as the performance of other schemes previously launched by the AMC may be a good filtering mechanism along with how the performance of the fund manager of this new fund in other previous schemes fared out.

Another disadvantage is that New Fund Offers tend to come with higher initial expenses. When AMC come up with new funds and launch them in the market, they aggressively spend money with the objective of attracting investors to put money in their new fund. Resultantly, the associated marketing costs are considerably high. Due to these marketing efforts, the AMC tends to recover the capital invested from their investors by passing on the cost to them in the form of a comparatively higher expense ratio.

Conclusion

All these factors which we discussed must be weighed in while investors decide to invest in NFOs, and their personal discretion along with their risk appetite matters a lot while making such decisions.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100.  AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product.