Picture this, you come across an NFO (new fund offer) for a fund that invests in emerging technologies, and you are intrigued by the potential for high returns. You weigh the risks and rewards and eventually decide to take the plunge. After a few years, that fund has grown significantly, adding to your profits. That’s the power of investing in NFO, a first-time subscription offer for a new mutual fund scheme introduced by an asset management company.
As always, it’s important to research and understand the risks before making any investment decisions. On that note, here are some potential pros and cons associated with a new fund offer in mutual funds so you can add them more responsibly to your portfolio.
Advantages of investing in NFOs
Opportunity to invest in a new scheme
AMC launches a new fund offer to give investors access to a new investment theme or objective. If the investment objective aligns with your financial goals and risk appetite, investing in an NFO can be a worthwhile opportunity.
Diversification at the start
NFOs often invest in different securities that existing funds do not. This can help investors diversify their portfolios at the start of their mutual fund journey. Diversification is crucial in reducing investment risk, and NFOs can help new investors achieve this.
Potential for higher returns
During the NFO period, investors get fund units at the lowest possible price possible. This gives investors a potential advantage as the fund’s NAV (net asset value) is usually higher once the scheme is listed on the exchange.
Risk associated with investing in new fund offers
Lack of track record
Unlike existing mutual fund schemes, NFOs are new offerings that don’t have a track record to evaluate how successful they will be. As such, investors have to make decisions based on other factors such as fees and expenses or fund house reputation before committing to an NFO.
With no established performance history, NFOs are considered high-risk investments because the portfolio may not have been tested in different market conditions. As a result, there is uncertainty as to how it will perform and whether or not it will return initial investments with profit.
Short window period
Investors only have a limited time to invest in NFOs because, as per SEBI regulations, NFOs are available for subscription for up to 15 days. This short window period can put pressure on investors who need to make an investment decision quickly without sufficient time to thoroughly research and evaluate the potential risks and rewards.
Lack of liquidity
Closed end NFOs lack liquidity, which means that investors cannot buy or sell the units of the fund after the NFO period ends. These funds have a fixed maturity date, and can be redeemed after maturity.
So, should you invest in NFO?
While NFOs do present promising investment opportunities, it’s important to examine the details and risks involved carefully.
Take some time to read through the document released by the AMC following the launch of an NFO, which contains all the necessary details of the fund. Such documents provide valuable insights into the fund objectives, risk profile, benchmark index to compare performance with similar mutual funds, asset allocation pattern, among other essential details. This information helps determine if the NFO aligns with your risk appetite, return expectations, and investment goals.