When it comes to investing in mutual funds, investors often have a choice between investing in a new fund offer (NFO) or an existing scheme. NFOs are newly launched funds that are trying to raise money from investors. Existing schemes, on the other hand, have been around for some time and have a track record of performance.
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So, which is the better option? It depends on your individual circumstances and investment goals. Here are some factors to consider:
Portfolio transparency: NFOs do not disclose their portfolio during the NFO period. This means you won’t know which companies the fund manager plans to invest in. Existing schemes, on the other hand, have their portfolios publicly available. This gives you more information to make an informed investment decision.
Track record: NFOs don’t have any track record to speak of. This means you can’t use past performance as a guide to future returns. Existing schemes, on the other hand, have a track record that you can review. This can give you some indication of how the fund has performed in the past and how it might perform in the future.
Expense ratio: The initial expense ratio of an NFO could be higher than that of an existing scheme. This is because NFOs typically have higher marketing and distribution costs. Although the SEBI is taking a lot of initiative to cap the expense ratios of existing funds and New Fund Offers.
NAV: During NFO the fund is available to invest at Rs. 10/- It’s a misconception that NFOs are cheaper than existing schemes. The NAV of an NFO is not cheaper than the NAV of an existing scheme. NAV represents the market value of the underlying securities in the fund, not the market price of the fund’s investments.
Overall, NFOs are a riskier investment than existing schemes. This is because you don’t have any information about the fund’s portfolio or track record. If you’re looking for a more conservative investment, an existing scheme is a better option. However, if you’re willing to take on more risk, an NFO could be a good way to get exposure to a new asset class or investment strategy.
Here are some additional things to consider when deciding whether to invest in an NFO or an existing scheme:
The asset class or investment strategy that the fund offers: If you’re looking for exposure to a particular asset class or investment strategy, an NFO may be the only option available.
The fund house’s track record: Do some research on the fund house that is launching the NFO. Look at their other funds and see how they have performed in the past.
The fund manager’s experience: Who is the fund manager of the NFO? Do they have a proven track record of success?
The NFO’s fees and expenses: Make sure you understand the NFO’s fees and expenses before you invest.
Understand the reason: It’s important to know before investing what’s the reason of launching that NFO from an asset management company. Are there existing schemes in the same category of the fund and their performance track record in the past.
Ultimately, the decision of whether to invest in an NFO or an existing scheme is a personal one. There is no right or wrong answer. It depends on your individual circumstances and investment goals.
Here are some recent trends in NFOs
NFO collections fell by 70% from April to September 2022.
The MF industry collected Rs.16,205 cr in April-Sept 2022 as against Rs.54,354 cr in April-Sept 2021.
Despite launching 56 schemes between Apr- Sep’22 compared to 53 schemes between Apr – Sep 2021, the MF industry experienced a sharp fall in NFO receipts during the first half of the current fiscal year.
Currently, NFOs are largely directed to complete the existing product boutique and are not mainline funds.
What does this mean for investors?
The decline in NFO collections suggests that investors are becoming more discerning and are only investing in NFOs that offer something unique or innovative. This is a positive development as it means that investors are more likely to invest in funds that have the potential to perform well.
However, it also means that investors need to do their research before investing in any NFO. They should carefully consider the fund’s objectives, strategy, fees, and track record before deciding.
If you are contemplating investing in an NFO, it is advisable to consult with a financial advisor. They possess the expertise to evaluate your unique circumstances and investment objectives, allowing them to provide personalized guidance regarding the suitability of an NFO for you.
