Mutual Fund Investing: Be aware of these things before you invest in an NFO

If you invest in mutual funds, then I am sure you know about NFOs. Whenever a fund house or AMC launches a new scheme, it is termed an NFO (or New Fund Offer).

If you look at the Indian mutual fund space, it is already overcrowded with several AMCs and hundreds of schemes that basically have similar offerings. Though the regulator SEBI, in 2018, did carry out a useful rationalisation exercise, the space has too many options for the common investors.

On top of that, fund houses regularly launch new schemes to woo investors. At times, the new schemes have something unique to offer. But quite often, what’s on offer is similar to what’s already available.

So, should you invest in NFOs?

Or are these best avoided?

Here are a few points to keep in mind before deciding.

NFOs are new funds. And naturally, there is no historical data or track record to rely on. All we have is the marketing material that the fund houses use to promote these schemes and make them attractive. Since you will invest your money (assuming you consider it hard-earned), it’s always a good idea to keep a bulk of it in established and proven schemes. So ideally, never bet big on new funds offered.

READ MORE: In the season of NFOs, what should investors choose: active or passive funds?

There are hundreds of funds out there. So, when an NFO is launched, we need to figure out what is so unique about this new NFO that was not already available earlier via the existing schemes. If the new fund is neither unique nor any different from existing options, then there is no point in going for the new kid when you have established funds doing the same thing with a reliable track record. Isn’t it?

The above two points were about the new fund offer itself. But what about your existing portfolio? Do you already have several schemes which have a lot of overlap? If that’s the case, then the addition of a new scheme in your already cluttered portfolio will not be of any help. You may call it diversification. But unnecessary diversification only leads to portfolio overlap and doesn’t help beyond a point.

Some people have this crazy idea that if NFO is coming at ₹10 NAV, then it means they are getting it cheap. Please don’t believe that argument. It’s nonsense. Don’t just invest in the NFO because it has an attractive starting ‘cheap-looking’ NAV of ₹10.

So, all said and done, my view is that you shouldn’t be in a hurry to invest in an NFO. It’s not like an IPO of a stock. And unless the new NFO really has something unique to offer which wasn’t already available via existing funds, it’s better to give the said NFO a miss.

READ MORE: Why should one invest in an NFO when there are plenty of funds to go around?

Not just that. You should also evaluate your existing portfolio of mutual funds and see how the new fund (if you invest in it) will fit into your existing portfolio. For example – if you already have 10 equity funds in your portfolio, chances are that inclusion of the 11th fund via the NFO will add nothing new to your portfolio. It will practically overlap something or the other from the original 10 schemes.

On the other hand, if there was a gap in your mutual fund portfolio that is only being filled by the new fund (and there are no existing schemes offering something similar), then you can consider investing in the NFO.

Remember that AMCs are in the business of managing money. So, it’s in their interest to have more money coming in. This means that for them, there is always a business case for launching NFOs even if there is no investment case for the offering.

So as a smart investor, don’t be blinded by the marketing of the AMCs and distributors/agents and invest in NFOs only after considering its uniqueness as well as how it fits in your existing mutual fund portfolio.

Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.