NFOs or New Fund Offerings have created a lot of buzz in the markets lately. One after the other, some big name Fund houses, such as Kotak Mutual Fund & Mirae Asset have launched NFOs in recent times to offer investors a new investment avenue based on a new focused strategy.
Now, while the more important and common question is whether one should invest in NFOs or not, we’ll talk about it a little later. First let’s understand what an NFO is.
So, What is an NFO?
NFOs are limited time offerings. Which means that subscribing to these funds are open for a pre-defined period only, lasting not more than 15 days. This is as per SEBI guidelines which mandates mutual funds to offer NFOs for a time period of only 15 days, so as to improve the efficiency of the process. The pricing of NFOs are however not fixed and can range from a minimum of Rs 10 to Rs 1000. Once the offering ends, the investors are allotted the number of units of the particular fund, they initially applied for.
A point in case here is although there’re some minute fundamental similarities between NFO vs IPO (Initial Public Offering), from an investment perspective, they’re not same.
Types of NFOs
Just like Mutual Funds, even NFOs can be both open-ended and close-ended. The difference being, in open-ended NFOs, an investor can withdraw the amount invested once the NFO closes which isn’t a possibility with close-ended NFOs. With close-ended NFOs, the maturity period is pre-decided by the fund and investors cannot withdraw their money before the maturity period.
Things to Consider before Investing in NFOs
Let’s say you’re thinking about whether you should invest in an NFO or not. But do you know what all things you need to consider to arrive at that decision? Below is the list of important considerations you need to take into account before investing in NFOs.
Fund House Reputation
Given that NFOs are a pretty unstable investment option, with no track record to measure, it’s only wise to consider the reputation of the fund house. It’ll be like a background check wherein you should be looking at the total time period the fund house has been on the scenes (the longer the better), the track record of the fund house and its performance during the market volatility.
Fund Objective (Theme of the NFO)
The entire reason NFOs are launched is to provide investors with a new and “focused” investment strategy. And the fund objective is going to be an important consideration for you to understand how the fund manager is going to use your money and if you’d want to align to their psyche.
On the other hand, if the objective reads to be pretty convoluted to you, then that’s probably where you need to pull the brakes. The objective of any scheme, ideally, should be such that even beginner investors are able to clearly understand it.
Risk & Returns
Unlike existing mutual funds, NFOs provide little in the way of information that can help investors evaluate the funds’ returns and risk potential. This is because they don’t have a history, bringing in a lot of uncertainty. Hence, investing in NFOs means taking on a much higher risk, without having any clue on the returns.
So the only thing you can do is take a look at the other funds of the fund house that are being managed by the same fund manager and then based on their performance, take a call on the NFO.
A lot of times NFOs are available at a meagre Rs 10 per unit. Which makes for a very attractive buying proposition for, mostly, beginner investors, who aren’t aware of the market movements so much. Hence, investors shouldn’t take the price point as their sole consideration.
And even when the minimum subscription price is on the higher side, you, as an investor, need to decide if you’re willing to put in that kind of money into a high-risk investment avenue.
In case of close-ended NFOs, there’ll be a maturity period, before the lapse of which, you’ll not be able to withdraw your money. And this is why you need to take a good hard look at your investment horizon criterion as well. If you don’t want to stay invested for a substantial period of time, one that the NFO requires you to be, then it’d probably be better to not subscribe to it.
And while you can withdraw your money even before maturity, but you’ll have to bear exit load for that which can be anywhere from a low of 0.30% f the invested sum to above 1.5% – this could end up to be a big penalty for you to part with.
Time for the most anticipated question about NFOs,
Should you Invest in an NFO or not?
NFOs look like lucrative investment opportunities available at cheaper rates, but make no mistake, they come with a whole host of risk factors – the ones we talked about above. All the above discussed pointers should play an active role in your decision making process, and on top of that we’ll give you two more considerations to think make.
- NFOs, due to their very nature, are high risk. So, if you don’t have a high risk tolerance, don’t go for them.
- It’s wise not to allocate a very large portion of your funds in NFOs. It’s better to start small, and you can always increase your contributions even when the offering is closed.
Hence, your answer to should you invest in NFOs or not needs to be formulated after factoring in all the above stated pointers. If you feel like the NFO aligns with your expectations, then don’t let the negative sentiment of the markets bog you down. You should go for it then!
And in case after reading this you feel that NFOs might not be the investment option for you, following are some other fund categories that we’ve specifically curated, keeping the market and political conditions of 2019 in fray.