Should you invest in mutual fund NFOs?

NFO stands for New Fund Offering.

It is very similar to IPO – Initial Public Offering. But one cannot draw parallels between NFOs and IPOs in every aspect.

In an IPO, the concerned company’s shares are going to be on the offer for the first time. You know what you are getting – shares of a certain company X whose financial statements are publicly available for your reference.

In an NFO, however, it doesn’t exactly work like this. An NFO for a certain fund is announced by the AMC and subscriptions are invited. You can invest as much as you like in the fund scheme – whose fund manager and fund category are known during the issue – given you are investing greater than a certain amount (generally Rs. 5,000). There is period of around 2 weeks during which investments are accepted.

Once the investments come in, the fund manager gets to work. He finds securities and invests in them according to the mandate of the fund and his expertise.

See the difference? In an IPO, you know what you are getting. An NFO, on the other hand, is a black box.

However, this doesn’t mean NFOs are bad. Here are some instances during which NFOs may make sense –

There is a public track record of the fund manager and it is impressive! When you invest in a mutual fund you entrust an investment team led by a fund manager to find the best investment securities for you. If the fund manager has an impressive track record and the fund mandate fits your requirement, that NFO makes sense!
It is an index fund. While no two index funds are identical, the fund manager’s importance in an index fund is not considerable. If there is an index fund that’s to your liking, NFO makes sense.
It is a brand-new themed fund. If you come across an NFO of a fund that invests a brand-new theme that you always wanted to invest in, then NFO would make sense. But still, remember that the fund manager is the most important guy – new theme or old!

Should you invest in mutual fund NFOs?

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