Whenever you refresh the finance segment on a news application, you’ll come across headlines like “XYZ set to introduce a New Fund Offer (NFO), here’s everything you should be aware of.”

But what precisely is this NFO, and why has it gained such popularity that numerous fund houses are unveiling hundreds of them annually?

Most importantly, should you consider investing in them? Let’s explore!

What is a New Fund Offer?

When an asset management company, for example, Axis Mutual Fund, HDFC Mutual Fund, Quant Mutual Fund, etc., initiates the launch of a new fund, it offers investors to purchase its units for a limited period. 

The primary objective is to secure funds to buy stocks to establish the fund’s portfolio.  Generally, the units are offered at a nominal price. This process is commonly referred to as NFO or New Fund Offer.  

Majorly, there are two types of NFOs:

Open-ended: Open-ended funds refer to mutual fund schemes that allow investors to buy or sell units at their convenience. These funds offer excellent liquidity, enabling investors to enter or exit the scheme at any time.

Additionally, even after the NFO period concludes, you have the flexibility to acquire units of open-ended funds on any business day at the prevailing market Net Asset Value (NAV).

Close-ended: Investment is limited to the NFO period exclusively for these schemes, which are issued for a predetermined duration. After the NFO period concludes, additional investments in the fund are prohibited. Redemption occurs subsequent to the funds being listed on the stock exchange, adhering to SEBI regulations stipulating that all closed-end funds must undergo listing.

Advantages

Here are some advantages as to why NFOs seem like an exciting investment option:

New Diversification Opportunity

Certain NFOs introduce inventive or specialized investment themes or strategies to the market, offering investors an opportunity to diversify their portfolios uniquely.

Growth Potential

Investing in NFOs can offer high-return potential considering you are investing in their initial growth phase. NFOs expose investors to different sectors which might prove fruitful in the future.

Also Read: Should I Exit a Poorly Performing Fund ASAP?

Disadvantages

It certainly isn’t all good. There are some major drawbacks to investing in an NFO like:

No Observable Data

New funds lack historical data. Hence it’s impossible to draw any conclusions, making it hard to assess its future potential. Hence, you should choose funds with a proven track record in established categories.

Misleading Costs Involved

Generally, most NFOs are allowed to charge you a higher expense ratio which means you get lesser returns. On top of that, we often get fooled by the fact that an NFO provides units cheaply.  However, that doesn’t matter because your returns are based on relative growth, not absolute NAV growth. 

Should You Invest in NFO?

The primary drawback is the absence of historical performance data for analysis. However, if you have strong confidence in a new opportunity, such as a fund focused on AI companies and believe in the transformative potential of AI, it might be worth considering an investment.

For categories like ELSS, Small-Cap, Mid-Cap, and other mainstream options, it is better to prioritize funds with a demonstrated track record.

Therefore, it is more prudent to opt for established mutual funds in these categories rather than making speculative investments.

Disclaimer: The above content is for informational purposes only. The 1% News recommends consulting a SEBI-registered investment advisor before investing in any mutual fund.