Mutual Fund NFOs - should you invest in them?

Whenever a fund house launches an NFO, there is a lot of buzz in the market. You see ads everywhere; there are fund manager interviews where they extol the virtues of the new fund’s investment strategy, you see newspapers carrying articles detailing what the new fund is, and a whole lot more.


With so much happening around you, it is quite natural to get carried away and invest. But is it a good idea to invest in an NFO? Before that, let's learn what are NFOs?


So, what exactly are NFOs?

When an asset management company launches a new fund, it first opens it up for a subscription for select days. The aim is to raise money for buying stocks for the fund’s portfolio and get it off the ground. This entire process is called NFO or New Fund Offer.

In a lot of ways, it looks like an IPO, and that pushes people to buy in the NFO period. But there is no advantage like IPO. We will come to that later.

Now, as per regulation, in India, the NFO duration cannot be more than 15 days for any mutual fund.


After the NFO period, if the fund is open-ended, it starts accepting new investments within a few days. So you can invest in a fund after the NFO period as well.


If it is a close-ended fund, then an investor can subscribe to the fund unit only during the NFO period and will have to hold it until the end of the duration.



3 major reasons for avoiding NFOs:

1. They don't have any track record to rely on.

Most of the time mutual funds sell old wine in new bottles; meaning they launch funds that are pretty similar to the ones that are already in the market and have an established track record.


2. Launch Timing

More often than not, NFOs are launched when market momentum is strong, valuations are high and there is good news all around. This limits the chance of fund managers getting good bargains while constructing portfolios. Basically, such a strategy relies on euphoria netting good investor response than any intrinsic ‘goodness’ of the offering.


3. NFOs are not like IPOs

People look at NFOs as they look at IPOs. They think they will get benefitted if the demand for fund increases, just like it happens in stocks. A MF works in a different manner. The price of a MF does not matter – whether you get it at a NAV of Rs 10 or Rs 2000 – what matters is the future percentage returns it will get you.



Conclusion

Investing in NFOs is like a shot in the dark. It will be wise to opt for an existing scheme that has a proven track record instead of going for something new or unpredictable.


Even if it is something unique and can be a good fit in your portfolio, wait for some time to see if the theme or investment strategy plays out as intended.