Despite the turbulent times in a volatile market, mutual funds have not lost their sheen and relevance for individual investors like you! The mutual fund industry over the past year witnessed a record inflow of funds, primarily through SIP accounts. In a booming market, mutual funds are likely to attract more and more investors by launching new fund offers. A 'New Fund Offer' (NFO) launched usually revolves around a specific investment theme or exotic investment objective and is aimed at raising fresh funds by any asset management company. At Rs. 10/- a unit, an NFO can sound like an attractive investment opportunity. But is it the best way to invest in Mutual Funds? Well, honestly it depends. So let's see the pros and cons of an NFO before drawing out a conclusion!
First things first - NFO and IPO are two entirely different things. If you’re comparing the two, there’s no similarity and it’ll get you nowhere! Any mutual fund including an NFO is aimed at pooling money from investors that in turn gets invested in equities. The base NAV of an NFO is kept at Rs. 10/- for making the initial unit allocation simpler and keeping in mind the accounting purposes. Unlike an IPO, Rs. 10/- doesn’t mean the NFO is intrinsically-valued, for at present it doesn’t hold any stocks.
Each New Fund Offer document specifies an investment objective that offers to invest in stock markets and is based on themes like banking and financial, pharma, technology stocks etc. It can also be goal-based such as retirement funds, children’s funds or offer to invest in stocks, based on their market capitalization (small/mid/large-cap funds). Most of the offer documents that you come across might sound very interesting and will attract you to invest. Deciding to invest in an NFO is not a bad idea. But you should be careful in choosing the funds and unless you find an attractive investment opportunity, it’s always wise to stick with proven funds. So let’s understand the pros and cons of an NFO that might just help you make the right decision with an upcoming one!
- Credible Fund Manager:
A good Fund Manager is one of the most important aspects when it comes to investing in mutual funds, especially NFOs. A Fund Manager with a proven track record that has sailed through different market phases is a plus for any NFO. The reason being, a New Fund Offer is like starting with a clean slate! The fund manager gets to choose which stocks to invest in that’s based on the investment strategy. It allows the fund manager to undertake well-researched calls and follow the latest trends in the markets; allowing quick growth in the fund’s NAV.
- Staggered Buying Opportunity During a Downturn in the Market:
It’s simple math! Buying low averages your cost, allowing you to generate higher returns when the stocks rise. A well-established fund will have deployed all the pooled funds and won’t be in a position to make fresh additions in its portfolio.
However, with NFOs things work out differently at the start! The entire amount collected during the launch of an NFO is deployed in a period of around 3-6 months. Now, a bear market would be the best time to invest in NFOs. This is because the funds are deployed in a staggered approach, thereby allowing the fund manager to make fresh purchases at lower rates, eventually averaging out the cost of investment!
- An NFO can be a Risky Investment:
When you’re investing in a mutual fund, you’re essentially investing in a fund’s ability to generate wealth. Such judgment can only be derived from a fund’s past performance.
How has it performed in different market cycles? Is the stock-picking strategy successful? These are some questions that’re not possible to be answered with an NFO as there’s no track record. Just the name of an asset management company and the capabilities of the assigned fund manager are what you anchor your decision on. It takes a few years to build up a proven track record and if the NFO falters during that period, you face the risk of losing your money or at least some of it. So only invest in an NFO if there’s at least one strong factor. It could be an exotic investment opportunity, an extremely successful fund manager or you simply have a high risk-appetite.
Even the most successful mutual fund started with an NFO once. It’s not a definite ‘Yes or No’ decision to make. Neither is there a formula that helps you derive the successful outcome of an NFO. You ought to consider the various factors mentioned above and most importantly have the risk appetite to bear with the fund during turbulent times. So research, choose smartly and always go for a unique investment strategy that backs up your financial planning. But if you want to stay on the safer side, speak to our skilled advisors at 5nance who can help you make sound investment decisions. Simply call them on 022-67136713 or email email@example.com