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When you discuss about mutual fund, you invariably come up with a term NFO, which stands for New Fund Offer. You may be very familiar with Initial Public Offer (IPO), a direct offer by the company to subscribe to its shares that can be traded in the stock exchange later. Similarly, mutual fund companies launch a one-time subscription offer via NFO, which generally comes when the market is on an upswing. However, there are hazards associated with such offers as well. So, you have to be cautious and use your discretion while subscribing to NFOs. We will make it easier for you by providing in-depth information regarding NFOs so that you can take a call on the same. Without much ado, let's unravel the concept of NFOs by virtue of information shown in the article below.
What Exactly NFO is?
Asset management companies (AMCs) launch NFO from time to time. The NFO allows you to buy mutual fund units at Rs 10 per unit, which is usually charged during the subscription period. In case of a close-ended fund, you can purchase the units only at the time of subscription. Further, you have to hold the units till the time the subscription is valid. However, in case of an open-ended fund, you can buy units even after the expiry of subscription period and redeem the same any time.
Why do NFOs Come in Bull-run?
AMCs invariably launch NFOs to tap into the psyche of investors who think prudent to invest when markets are at a higher level and the investment cost is lower. So, when investors see NFOs being priced at a cheaper rate of Rs 10 per unit in a growing market, they pump in a large sum of money with a view to generate more return. And to capitalize on this investor mindset, mutual fund firms come up with NFO and enhance their asset under management (AUM).
Be Cautious while Investing in NFOs
NFOs come with a higher degree of risks. So, you need to be vigilant and take necessary measures as stated below.
1. Absence of Proven Track Record
NFOs debut with a new idea, investment theme or sector and thus it becomes increasingly difficult to estimate the performance of the fund in the future. You can always take a call on the old funds by checking their performance over the years. However, the same is not possible in case of NFO due to the lack of a proven track record.
2. High Initial Expenses
With NFOs, come the higher marketing charges and other initial expenses, which form a certain percentage of the assets being held by the fund. These expenses are deducted from the net asset value (NAV) and thus shrink the returns substantially. So, when you look to buy new funds, make sure the charges are not high.
3. NFOs Not Cheaper than Other Funds
Don't go by the illusion that NFOs, which are generally offered at Rs 10 per unit, are cheaper than other funds with NAV of more than Rs 10. As soon as the NFO period gets over, AMCs will invest the money, accumulated in the fund, in the underlying assets and the sum of investment value of all the securities on any given day will thus become the new price of the NFO.
4. Reduced Scope for Diversification
NFOs are usually sector specific and focus on certain mid cap or small cap funds, thereby resulting in reduced diversification of your investments. Proper diversification plays a vital role in strengthening the mutual fund portfolio by compensating the investors for the loss in one sector with the returns made in other.
5. Read the Investment Objective Carefully
It becomes important to carefully read the investment objective of the NFO before investing in the same. With the objective, you can make out whether the NFO will help you achieve your investment goals or not. Suppose your goal is to create a large corpus to invest in the wedding of your children 20 years later, then the objective of NFO should read as capital appreciation over the long-term. If the objective does not match your needs, then stay away from investing in the NFO.
With no track record in place, NFOs do pose a fair amount of risk for the investors. So, before you invest in NFO, check out the performance of the fund house and its schemes over the years so that you can run a safe investment ride.