There can be two ways you can subscribe to a mutual fund scheme, either through investing in already existing schemes or by NFO (new fund offer). Before jumping to the straight answer to should you invest in or not, let’s understand what a new fund offer is.
What is a NFO?
Just like an IPO, a company launches its IPO to fund their expansion and further operations for growth. Similarly, asset management companies also offer their new fund offering on a first subscription basis to fund securities purchases. This way asset management companies can get to invest in multiple asset classes for their customers and also be able to achieve their AUM (assets under management) goals.
Should you invest in NFOs?
There are various asset management companies offering NFOs like HDFC, ICICI, Nippon, and SBI, all set to launch during the month of November 2022.
No historical data
If you are an investor who believes in historic data, then a new fund offer is not a viable option for you, as the company might have shown a better performance within the industry but it doesn’t mean that it will perform well in the new theme of the offer too.
They are less expensive than existing schemes, as they are new. New schemes face difficulty in building trust, so fund managers keep the subscription prices low to attract investors. If the theme is sustainable enough, it could be a better opportunity to invest in.
Reduced overall cost of investment
Overall cost of investment is less. NFO doesn’t have any entry load, and the company charges exit load only in the case of exiting before the lock in period. If your investment horizon is more than the lock in period of the NFO, your overall cost of investment reduces in comparison to existing schemes.
Why should you invest in existing schemes?
Mutual funds not only offer the benefit of diversification but also let you stay disciplined with your investments. Here are a few reasons why you should choose existing schemes over NFOs.
Existing schemes are rolling over a significant period of time, you have proven data that act as an evidence for its future returns. You can have an estimated percentage of returns.
If you want to be a disciplined investor, you can start investing by a small of ₹500 as well through SIPs (systematic investment plan). However, your SIP would depend on the various factors like risk appetite, and assets allocation ratio.
Overall cost of investment
In the case of existing schemes, your overall cost of investment becomes higher as there are various investors who are willing to invest in the scheme due to trust in the scheme and high return expectations. Companies charge entry and exit fees more in such schemes in comparison to NFOs.
By considering the above mentioned comparison, it is quite clear that if you are willing to take risk and you do not have much money to bet on, it might be a good opportunity to invest in NFOs only after looking at the sustainability of the theme of that particular NFO. If the former is not the case, then you can continue with the investment in existing schemes according to your financial objectives and risk appetite.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com