What is New Fund Offer (NFO) and should you invest in it?


New-Fund-Offer-(NFO)
New Fund Offer (NFO)
New Fund Offer (NFO) is used by AMC's to offer a scheme to the public for the first time.It contains details of the Mutual Fund scheme offered and in a way it can be compared to an IPO.






What is  New Fund Offer (NFO)


A Mutual Fund AMC uses New Fund Offer (NFO) to raise money from the market for the new scheme. It is for a limited period of time in which the investor can invest money in the prescribed value(generally it is Rs 10 (NAV), and after the offer is over it can only be bought at the prevailing market rate.If the New Fund Offer (NFO) is for a closed Mutual Fund then investors can only buy it during the initial offer and may exit it only after the duration as mentioned in the NFOP.

Procedure of making of New Fund Offer (NFO)


Based on the input from various sources and also as per the prevailing market condition, the Mutual Fund AMC decides to launch a new scheme.The New Fund Offer (NFO) is prepared after concurrence and approval of the trustee and board.It is then filed with SEBI and the observations if any by SEBI are incorporated.A suitable timetable is decided for the new offer which includes dates for NFO open and close and then it is launched in the market for the public. The next stage is the marketing and promotion of the NFO.


Contents of Offer Document



Offer Document is used by AMC to launch the New Fund Offer (NFO).It contains all the details that are necessary for the investor's knowledge to make an investment decision. It contains details of the scheme, its risk, hence category objectives etc. It is made strictly as per the format as prescribed by the SEBI.As the investment in the scheme is on the premise that investor has purchased only after reading the scheme documents hence it is important to read it thoroughly.The Offer Documents has two parts namely Scheme Information Document(SID) and Scheme Additional Information(SAI).

Why Should You Not Invest In NFO?

As mentioned earlier, NFO is a new scheme by the Mutual Fund house. Some of the reasons why you should not invest in an NFO are as follows-
What-is-New-Fund-Offer-(NFO)-and-should-you-invest-in-it-?
What is New Fund Offer (NFO) and should you invest in it?

     High Initial Expense 

     When the NFO is launched,  the  AMC has to do lots of advertising and promotion work. They also use the services of big brokers for the promotion of the NFO. These expenses are deducted from the NAV of the NFO MF. It can thereby be said that it is more expensive than an older MF scheme.

     No Past Track Record 

     An often heard line for selection of Mutual Fund is checking of past track record. As an NFO is newly launched, it does not have any track record for the investor to make any investment decision.Closed Ended Many NFO are closed ended. It is, therefore, a risk to block money in it for the duration, as it will be difficult and costly to come out in the case of non-performance.

     Sector/Thematic Funds 

     Many NFOs in the past have been sector funds or Thematic Funds which carry a high degree of risk and require great nuances and experience to understand and invest.

     The Misnomer of Cheap NAV 

     As an NFO is launched with an initial NAv of Rupees 10, many investors fall for the lure of cheaper NAV. In fact, there is no such thing as cheaper NAV in Mutual Funds. The Mutual Fund NAV doesn't really mirror a share price. A Mutual Fund with a NAV of Rupees 200 may be a better performer than other with NAV of 10 Rupees.

     Misleading Names 

     Many Mutual Fund AMCs launch NFO with fancy and misleading names just to lure the investors. One needs to be careful of that.

     Mis-selling 

     It is a well known open secret that some Mutual Fund AMCs pay their advisors and brokers higher commissions and other benefits for NFOs, so they are very keen to do great pitching to you. you should be careful when that happens with you.


When should you invest in an NFO?


Having seen reasons as mentioned above regarding why to avoid an MF NFO, the question arises whether there are some cases or circumstances when you should invest in the NFO. Well sure there are, some of them are as follows-

       Unique Fund Missing from your portfolio

       If the NFO is some unique fund which is missing from your portfolio and an alternative is not existing in the market then you may think of buying the NFO. An example is, I was for a long time looking for adding an AUTO Specific Mutual Fund to my portfolio, but other than UTI Transport and Logistics MF, there are not many good options available in the market(at the time of writing this post). So if ever a purely Auto industry MF NFO is launched, I might think of buying it.

       NFO by your Favourite Fund Manager 

       You might think of buying an NFO if it is being managed by your favourite manager with big alpha and good track record.


Conclusion


As Mutual Fund investment is based on the principle of caveat emptor, meaning let the buyer be aware, it is important that an investor understands all the risks involved in investing with NFO. It is always better to avoid the NFO and instead invest in Mutual Funds which are long established and have a good long track record. However, if you do decide to invest then you must read all the important documents related to the New Fund Offer (NFO) before making the investment decision.