New issues always generate excitement. When a new stock is released for the first time investment, it is an IPO whereas when a new fund offers is when a new mutual fund is launched by an asset management company (AMC) for the first time. While both IPOs and NFOs are mainly launched with the aim to raise capital, the two must never be confused.
When an AMC or a mutual fund announces a new scheme to raise the capital it is called an NFO. It allows the public to invest in the pool for the first time. The money raised is mainly used to invest in securities like bonds and equity.
The NFO is offered by the AMC or MF only for a specific period of time at a specified price known as the offer price. During this period, the investors can purchase units of the new scheme at this offer price which is usually fixed at ₹10. Once this period is over, the new mutual fund scheme is listed and post listing, the units of the scheme can be bought at the commanding Net Asset Value (NAV) of the fund.
NFOs are launched with a new idea or a theme due to which it is not possible to see past performances or predict the future. However, one can still look at the past performances of similar funds to get a rough idea.
Since it is difficult to predict how the NFO will perform and unlike companies that launch IPOs, funds do not have valuations or fundamentals analysed by experts to make this decision easy. So let's look at some basic things to keep in mind before investing in a new fund offer:
The reputation of a fund house is very important. An investor must not invest in an NFO from a fund house that has a shaky history. It is important that the fund house has been in the industry for at least 5-10 years and has the confidence of investors.
you must check the past track record of the fund house as well as the fund manager before investing in the NFO. You can also analyse past performances of similar funds launched by the fund house. The better the fund house, the higher your chances of a better return.
It is important to look at the costs associated with an NFO before investing. Since a new scheme may have a small corpus, the expense ratio of the fund may be higher. In order to increase your return, you should invest in NFOs with a low-cost ratio. Along with the expense ratio, you should also look at the minimum subscription amount. It can vary from ₹500 - ₹5,000. You may go for an NFO with a lower subscription amount in order to contain risks.
The theme is another very important aspect to consider while investing in an NFO. Different funds with various themes are available in the market. You should consider a fund with a unique theme that can be considered for a period of at least 5 years.
If the theme is already available in other funds, you can invest in them since you will be able to look at their past performances or use their past performances to determine the return potential of the NFO.
Also, you should never invest in a theme that is not sustainable for long-term investment. A theme that is in trend now but is not likely to be feasible in the long run should not be considered.
Scheme Information Document (SID): You must thoroughly go through the SID to check the investment objective and risks of the new mutual fund scheme before investing in one. It helps you understand the approach the fund manager will take and if it falls under your risk appetite or not. It will also give you information regarding the asset allocation of the NFO, so you can determine if it will be a perfect fit for your portfolio or not.
Why should you invest?
Since the offer price is usually set at ₹10, people who invest in NFOs gain handsomely during the listing. But since there is no past data available for the firm, it is important that investors research the past performances of similar fund schemes as well as that of the fund house hosting the NFO before investing in one.
However, if you find a fund with the same theme as the NFO, experts advise going for a fund that has already performed decently in the past. It is also important that you consider the above-mentioned factors before deciding to invest in an NFO and not do it just because it comes at a low cost.
You must also consider your investment goals and risk appetite and only invest in a fund that matches them.