Are New Fund Offers Worth Investing – Pros Of Investing In NFO
In 2021, the stock markets did well and gave good returns to investors Worth Investing. We see many IPOs from companies and NFOs from mutual fund houses whenever the markets do well. There are pros and cons to investing in these. This article will explore whether new fund offers are worth investing – pros of investing in NFOs.
Before we look at the pros of investing in an NFO, let us start by understanding the NFO meaning.
A new fund offering (NFO) is the process of launching a new mutual fund scheme wherein investors are invited to subscribe to the scheme for the first time. Through the NFO, the scheme raises an initial corpus, which the fund manager deploys for building an investment portfolio as per the scheme’s objectives.
After learning about NFO meaning, individuals can invest in an NFO either in lumpsum or start a systematic investment plan (SIP). The NFO is open for a specified number of days. Once the NFO closes, the investors are allotted scheme units in proportion to their investment.
Now that we understand the NFO meaning, let us look at some of the pros of investing in an NFO.
Pros of investing in an NFO
Some of the pros of investing in an NFO include the following:
- NFO is the only time you can invest in close ended mutual funds
In the case of a close ended mutual fund, you can subscribe to its units from the mutual fund house only during the NFO period. Once the NFO closes, there is no fresh issue of scheme units. If you wish to purchase the scheme units post-NFO, you must do it from the secondary market through the BSE or NSE. But, liquidity may be an issue in the secondary market, and you may have to pay a premium over the NAV to purchase the units.
Hence, the NFO is the best time to invest in a close ended mutual fund scheme. As there are no redemptions before the scheme maturity, the long tenure allows the fund manager to take a long-term investment call without worrying about redemptions.
- Opportunity to invest in a new or innovative theme
If the fund house is launching a new scheme with an innovative theme for the first time, as the NFO meaning suggests, it may be a good opportunity to invest in the scheme. Sometimes investors wait to see whether the innovative theme performs as expected before taking an investment call. In hindsight, it may be the right approach if the theme fails to deliver. But, if the theme delivers as expected or better, then the NFO investors will reap the benefits as first investors.
Opportunity to diversify your investment portfolio
Suppose the fund house is launching a new index fund, sectoral fund, thematic fund, international fund, fixed income fund, commodity fund, etc. In that case, the NFO is a good opportunity to diversify your investment portfolio. Every time you diversify your investment portfolio further, you reduce the risk further. Investment portfolio diversification provides better risk-adjusted returns. Also, you can use NFOs to invest in different asset classes. Appropriate asset allocation ensures your portfolio does well, no matter which asset class performs better.
- Flexible investment options in the form of lump sum or SIP
An NFO provides you with flexible investment options. You can invest a lump sum amount or start a systematic investment plan (SIP). Most AMCs keep the minimum lump sum investment amount as Rs. 5,000 and the SIP amount as Rs. 100. These minimum amounts are affordable to most people across various income categories.
- The expense ratio may be low during NFO
At the time of the NFO, a fund house has to spend on advertising through various media (television, newspapers, social media, outdoor hoarding, radio, etc.). They also have to print marketing collateral. On the one hand, the expenses are high during NFO, and on the other hand, the assets under management are low during the NFO. So, the expense ratio is usually high in the case of most schemes during the NFO.
However, some AMCs deliberately keep the expense ratio lower during the NFO. It acts like an incentive for investors to invest during the NFO and benefit from the low expense ratio. A higher expense ratio reduces your returns, and vice versa. The AMC may increase the expense ratio once the scheme acquires a decent corpus. In such cases, when the expense ratio is kept lower during the NFO, it benefits investors who invest during the NFO.
Should you invest during the NFO or later
In the above section, we have explained the NFO meaning & some of the pros of investing during the NFO. However, there are some disadvantages to investing in an NFO. What if the new or innovative theme does not deliver as expected? Also, new schemes don’t have any past track record or data to analyze and evaluate whether they are investment-worthy. Also, the expense ratio may be high during the NFO and may be brought down gradually as the AUM goes up. Even after learning the NFO meaning, if you have any of these doubts, you can always wait for some time and invest later once you see the results Read more