New Fund Offers (NFO) – Should we go for it

In the past few months, new fund offers (NFO) from mutual funds AMCs have been launched, and currently there are about 4 that are open (source from Groww). With markets (Nifty/Sensex) hitting all time highs, making a remarkable V shape recovery post the March-April lows, there is strong interest in the equity markets. Asset Management Companies (AMCs) and Fund houses are quick to catch this trend, and launch NFOs, to attract new investors and also expand existing investors into news schemes.

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What is an NFO

NFO is the first subscription offering for any new fund launched by an investment company

When a fund house launched a new mutual fund scheme, they give a period of about 20 days or so for investors to get units of the fund. Typically, the marketing is around getting the fund’s NAV at 10. So if you invest say Rs 5,000 in an NFO, you get 500 units of that fund.

For most open ended funds (funds where anyone can invest or redeem at any point of time post NFO), an NFO event is meaningless, as you can invest or redeem anytime. Getting an NFO at 10 or 11 makes no big difference.

For close ended funds (which are very few these days), NFO is the only way to buy units for such schemes. Here you buy and you are forced to hold the scheme till maturity. Most of these are tax or long term annuity based funds.

In short, when a mutual fund launches a new scheme, they need to make some marketing noise (as there is no past performance to boast about) and hence the focus on getting NAV of 10 or ‘attractive price’.

NAV Versus IPO

This draws similarity towards an IPO (initial pubic offering) of a stock, where you typically believe to get the stock at the most optimum price, post which you can expect capital appreciation. However, there is significant difference between an NAV of a mutual fund scheme and the price of a stock.

The price of a stock depends on the performance of a company – combination of revenue, profit & loss, cash flow and also on Governance. Si if there is a positive future for the company, the price of stock can gain significantly.

A mutual fund scheme pools your money along with others money and invests in several companies. So, a mutual fund can, in future, change the portfolio under it. Hence, NAV and price of a stock are not equivalent and a 10 NAV should never be a point to buy a mutual fund scheme.

Factors to evaluate an NFO before buying

First, before jumping into the mutual fund NFO route, please check if your risk profile allows you to enter a specific mutual fund. Some distributors have sold NFOs in the name of “new investors should enter via NFO”. So, check if you are okay to take risks – even debt funds have risk of losing capital.

Once you are sure you are okay to pick an NFO, the tough part comes. Most funds are launched with a specific reason and description, example Axis Fund has launched an NFO – Axis Special Situation Fund that says

To generate long-term capital appreciation by investing in mis-priced stocks facing special situations. The mis-pricing of stocks can occur due to companies facing special situations like regulatory/policy changes, management restructuring, technology led disruption and innovation or any temporary challenges in the operating environment. However, there can be no assurance that the investment objective of the Scheme will be achieved.

Axis Special Situation Fund from AMFI page

So, it sounds great. mis-priced stocks – means stocks that are potentially trading below their fair price. So the fund manager has a tough job to find such stocks and build a folio. Not that this is a review of the fund, but then at an NFO level, it does not let me what stocks they will invest. So it is tough to recommend NFOs (not just this fund, but any NFO in general). Why? Because we don’t know what stocks are being invested in and additionally, and hence evaluate the future performance of the fund.

Now, should it really matter if we have confidence in the fund manager and the fund house. Then the counter argument would be should it really matter if we invest only in NFO or take any fund from that fund house.

The key factors one can check for an NFO is the scheme and your risk profile, then the type of investment. Most AMCs already have diversified equity funds, which are the only ones I personally recommend.

So, conclusion?

These days ESG – Environmental, Social and Governance theme is running, and most NFOs (from AMFI website as a reference) are running NFOs on this theme. Should you go for it? My take is let us wait and observe. Not that the ESG funds have some new great companies to invest in – they have the same old HDFC and Infy to put money (cause they were already ESGed!).

Where can I get New Fund Offer list

Please visit AMFI page at https://www.amfiindia.com/new-fund-offer

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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