What is NFO in Mutual Fund? Should you invest in NFO of Mutual Fund schemes? Why Agents push NFO in Mutual Fund? Biggest sales pitch for NFO in Mutual Fund is NAV 10.
NFO in Mutual Fund – New Fund Offer
In simple words, NFO in Mutual Fund means a new mutual fund scheme from the mutual fund house. This offer will be for a short period of say, 30 days, wherein investors can invest in the new fund. Normally, units will be allotted at a price of Rs. 10/- per unit during this NFO period. After the first set of investors have invested and the portfolio and investor records have been created, the fund opens for on‐going sales. In an open-ended mutual fund, investors can invest either during the NFO period or after that at the prevailing Net Asset Value (NAV).
When the equity markets are performing well, or certain sectors are performing extra ordinarily well, you can expect the fund house to launch new schemes to attract customers to it.
NFO in Mutual Fund – Should I Invest?
If you want to invest in equities to get better inflation adjusted return, it will be better to invest in a mutual fund with good track record. A fund in the market which has seen different market cycles and bull and bear markets will be better compared to a new fund.
But you can consider investing in a NFO, if the fund house is launching the NFO on a new theme, which you feel has the potential to deliver better returns than other sectors.
Difference between Mutual Fund NFO and Share IPO
Initial Public Offer (IPO) of a company denotes the issue of shares of a company for the first time at the time of listing of the company in stock exchanges. Investors can buy these shares directly from the company at this stage. After that, they can buy the shares from the secondary market through stock exchanges. Investing in an IPO can help you in investing at the early stages of a growing business which can create good wealth in the long term. Those who have invested in IPOs of companies like Reliance and Infosys made huge gains.
NFO is not investing in a start-up or growing company like IPO. NFO is a new fund started by a mutual fund. It collects money from many investors and invests in shares and other securities as per the mandate of the scheme. The NAV of the scheme will change as per the performance of the underlying securities.
NAV 10 – Biggest Sales pitch for NFO in Mutual Fund
You can see many mutual fund agents recommending new funds and presenting it better than the higher NAV scheme. If you invest Rs. 10,000 in a NFO, you will get 1000 units, but if you invest in a fund with NAV of 200, you will get only 50 units. There can be temptation to get more units like this.
Will the investor who buys a new scheme at a NFO price of Rs.10 be better off than the investor who buys an existing fund at the current NAV‐based price of Rs. 200? No.
Both investments represent a share in a portfolio at current market levels. Let us assume that you have invested Rs. 10,000 in an NFO with a NAV of 10 and got 1000 units. You have invested another Rs. 10,000 in another fund with NAV of 200 and got 50 units.
Assume that the equity market return was 20% in that year. At the end of 1 year, the NAV of the new scheme will be 12 and the value of your 1000 units will be Rs. 12,000. The NAV of the old fund will increase to 240 with 20% return and the value of your 50 units will be Rs. 12,000. In both the cases, your investment has grown to Rs. 12,000! There is no way that the Rs. 10 fund will move faster than the Rs. 200 fund, if both invest in the same manner at the same time. Several investors fail to see this logic and look at the price per unit, rather than the rate of return.
An existing fund even at Rs.200 may be a good investment option, if the portfolio objectives meet your needs. A long-term conservative investor will be better off buying an existing fund at Rs. 200, than buying a risky new fund at Rs.10 in an NFO. The investor should give importance to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.
Why agents push NFO in Mutual Fund?
SEBI, the market regulator is of the opinion that if a fund house is having many non-performing funds, such fund houses should not go for further NFO. The distributors normally get higher commission and incentives by selling NFO. This is one reason why agents push “NFO in Mutual Fund“.