Factors to Consider When Investing in NFO

NFO, or new fund offer, is a new mutual fund scheme launched by an asset management company (AMC). During an NFO, the fund house offers the scheme units to the public for the first time.

The offer remains open for a limited period, creating a sense of urgency among investors. Additionally, while you buy units of an existing fund at the Net Asset Value (NAV), the units of an NFO are priced at Rs. 10.

However, unlike regular mutual funds, an NFO does not have a past track record to assess its performance. So how do you know if investing in an NFO is a good decision?

In this blog, we'll share the top factors you must consider to determine if an NFO is worth the investment.

Types of NFO

A NFO is mainly divided into two types: Open ended funds and close ended funds.

In open ended funds, the units in the NFO are available for subscription during the offer period and thereafter can be bought and sold from the open market, at any time, at the prevailing market price.

Close ended funds on the other hand are only available during a fixed tenure (mostly during the offer period) and can be redeemed only when the original investment tenure is over. This investment tenure can be anything from 3 years to 5 years or even more.

7 factors to consider when investing in NFO

#1 The AMC's track record and reputation

Assess the past performance and reputation of the fund house launching the NFO. Examine the performance of their existing mutual funds over different market cycles. Additionally, evaluate the experience and expertise of the fund managers associated with the AMC.

You must also check the AMC's stand in the market. Established and experienced fund houses that have weathered different market cycles typically have a higher potential to achieve the fund's objective and maximise returns.

#2 The investment objective of the NFO

Every fund lays out its specific investment objective. This can be capital appreciation, income generation, or a combination of both. Carefully analyse the objective to understand if it aligns with your financial objectives and risk profile.

You can go through the Scheme Information Document (SID) or product presentation to better understand the securities targeted by the fund, its investment strategy, asset allocation, , and more. Remember, NFOs do not have a past track record. Therefore, reading all scheme-related documents thoroughly is crucial to make an informed decision.

#3 The theme of the NFO

Every NFO has an underlying theme. It can be:

-sector-specific (for example, healthcare, technology, or infrastructure)

-asset class-focused (for example, equity or debt)

-strategy-focused (for example, value investing or growth-oriented)

Understand the theme carefully to evaluate if it aligns with your investment objectives, risk appetite, and financial goals. Make sure the investment theme is sustainable and allows you to diversify your portfolio. Additionally, if the theme is similar to an existing mutual fund, it is better to invest in that fund instead of the NFO. This is because you can track its performance and avoid adding similar funds to your portfolio.

#4 Investment horizon and minimum investment amount

Like normal mutual fund schemes, NFOs may be open-ended or closed-ended. NFOs may also have a definite lock- in period and minimum investment amount. All of these factors may differ from the amounts required when the fund is open for subscription at NAV or from the open market after the NFO has closed. Hence, while making an investment decision it is important to factor in these aspects and judge whether investing in the NFO is actually viable or not.

The minimum subscription amount in a new fund offer may range from INR 500 to INR 5,000.

#5 Other associated expenses

Lastly, before investing in an NFO, consider all associated expenses beyond the initial investment amount. This includes:

#1. Expense ratio: This is a fixed fee charged by the fund house for managing the fund. It is a percentage of the fund's average net assets. This ratio is typically higher for actively managed funds. The higher the expense ratio, the lower will be your net returns.

#2. Exit loads: These are charges levied by the fund house when you exit the fund. They are deducted from your investment and redemption amount, reducing overall returns.

Certain AMCs may also levy additional charges like transaction charges for specific activities or portfolio turnover costs. Make sure you are aware of all other charges before investing in an NFO.

#6  Do not be carried away with the cost:

Compared to a traditional mutual fund, an NFO is open to application at a NAV rate of INR 10. This low cost can often entice novice investors into parking their funds here. The biggest myth about an NFO is that it’s cheap. As an investor, you have to look at the price and valuations at which the fund house is investing in the current market. Moreover, a low cost does not guarantee a good opening, fund performance or high/ sustained returns in any way. Hence, before investing, investors should go beyond the price and look at the other quantifiable attributes that will affect the fund and its investments in the long term.

#7 Taxation

An NFO is taxed in the same way a normal mutual fund is taxed as per the Indian Income Tax Act. However, it must be noted that as per law not all mutual funds are taxed the same. Equity mutual funds and debt mutual funds have different criteria when it comes to calculating short term capital gains and long term capital gains. Hence, it is better to check the taxation structure of the NFO.

To wrap up

Before adding a new scheme to your portfolio, it is important to evaluate your existing portfolio and see if you can afford to/ need to bring in that added element of risk.

However, having said that – it is also important to be patient when it comes to judging the performance of a fund. Any new fund takes a minimum of two to three years to perform and generate valuable returns. Hence, this is only advisable for investors who are coming in for the long term.

NFOs allow you to invest in new funds right in the beginning. However, with no track record to evaluate their performance, they can often be a risky investment. Therefore, it's crucial to consider all important factors, such as their objective, theme, horizon, investment amount, additional expenses, AMC's reputation, etc.

You can your mutual fund investments with Tata Capital Wealth to gain expert advice and make smart investment decisions.