scorecardresearchWhy should one invest in an NFO when there are plenty of funds to go around?

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

Updated: 26 Jul 2022, 02:00 PM IST
TL;DR.
When there are number of mutual fund schemes in the same category of scheme, why should an investor subscribe to a new fund offer in the first place? We explain
Already over a dozen funds have been launched in past three weeks 

Already over a dozen funds have been launched in past three weeks 

Ever since capital markets regulator SEBI lifted the restrictions on new fund offer (NFO), some new fund is being rolled out every other day.

Already over a dozen fund schemes have been launched in the past three weeks which include ABSL's Nifty Financial Services ETF, Whiteoak Capital Flexicap Fund, Edelweiss Focused Fund and Mirae Asset Balanced Advantage Fund, among others.

So far in this calendar year, 57 schemes have been launched which include active, passive and close-ended funds. There are many more that are lined up to be launched in the next couple of months.

Investors often wonder if it is wise to invest in a new fund offer or should they explore the existing funds.

Old wine in new bottle?

Some wealth advisors say one should not let go of an existing opportunity particularly when it doesn’t exist in the market as of now, but they also point out that buying funds via new fund offers is generally not advisable.

S. Sridharan, founder and principal officer, Wealth Ladder Direct, says, “A lot of NFOs are being launched since most AMCs don’t have schemes in all the mutual fund categories prescribed by SEBI (in Oct 2017). So, more often than not, these schemes are an old wine in a new bottle. We don’t recommend NFOs to our clients unless there is a new and innovative scheme.”

“There is no compelling case for NFOs and investors should look at the existing schemes which have complete data on how fund manager has navigated the cycle, how the particular theme — be it large cap, dividend yield, flexi cap or thematic — has played out, and how has the individual scheme performed in the past,” said Amol Joshi, Founder of Plan Rupee Investment Services.

But it doesn’t mean investing in an NFO is a complete ‘no-no’.

“There is one exception i.e., when the product is unique and not previously available. For instance, in 2013-14, there was no balanced advantage fund. So, one could invest in the new category of funds via an NFO. Similarly, in the past two-three years, some AMCs have started offering schemes linked to S&P500 and Nasdaq, which were not available earlier,” he adds.

“Investors should avoid NFOs mostly. And it doesn’t make any difference whether the scheme is launched by a small or large AMC. The schemes by large fund houses smell of roses but their schemes are no different from those of other fund houses,” says Deepesh Raghaw, Founder of PersonalFinancePlan.

Ankur Kapur, Founder of Plutus Capital says that investors could invest in the schemes which are offshoot of existing schemes.

“NFOs should not be seen as an IPO. Surely it is a new scheme but no new stock is being listed. I would suggest that retail investors should stay away from the NFOs. If investors want to invest in a scheme, they should first see the history of the scheme, which is available in case of current funds only. Often times these schemes are just an offshoot of an existing strategy. In those cases, it is okay to invest because you can see the rating. But this happens only in the rare cases,” said Kapur.

First Published: 26 Jul 2022, 02:00 PM IST