Before deliberating on any advantages and disadvantages, it makes sense to define NFO. Essentially, an NFO is a New Fund Offer. It is the offer made by the mutual fund scheme for the first time to investors, inviting them to subscribe. Units of the scheme are made available for purchase at a fixed initial price, usually ten rupees. Thereafter, the scheme opens itself to normal transactions according to the Net Asset Value after the offer period expires.
NFOs tend to be newsworthy, as they have something new to offer—whether new ideas or new themes. However, when investors ask what is NFO, it is important to understand that every NFO carries a mix of benefits and risks. Knowing these aspects helps investors evaluate the opportunity carefully and make sensible, well-informed investment decisions.
Advantages of investing in an NFO
Access to a new idea
An NFO may offer a theme or strategy that is not available in the existing schemes. It might be a sector focus, a mix of assets, or even a unique structure. For an investor wanting something different, an NFO can be that something new.
Entry at the initial price
Units are available at a fixed price during the NFO period. This gives investors a clear starting point. The price itself does not define future performance, but does offer investors the chance to track the scheme from the beginning.
Diversification
Certain NFOs may even provide the investor with an opportunity to take positions in equity and debt assets such as gold and worldwide – but all within one scheme. Such inclusion creates a segmented risk environment.
Long-term clarity
An NFO launches with the investment objective risk and asset allocation as clear at launch. All this information is given upfront. This helps check with such long-term goals.
Transparent structure
Everything related to the fund's strategy becomes clear and known about the NFO at the time of the offer document. Benchmark, mandate, and strategy can be known before investing.
Disadvantages of Investing in an NFO
No past performance
An NFO knows no history; there is no track record to review. Investors have to accept what the objective states and rely on the said manager's approach. Judging how the fund may perform in different conditions may not matter in most scenarios.
Increased short-term volatility
This is when the fund starts building its portfolio at the closure of the offer. Hence some fluctuation may arise from such short-period movement in value due to prevailing market conditions. An initial fair amount of volatility is also expected owing to the fund starting from zero.
Lack of liquidity in close-ended NFOs
Some NFOs are close-ended. Units cannot be redeemed until maturity in these cases. Such schemes can be exchanges listed but with low trading numbers. This curtails flexibility.
Ambiguities created due to a low entry price
An impression that Rs 10 is an affordable entry point is created in several investors' minds. Misleading information can be created because of this low issue price. Net asset value reflects the real value of a portfolio. Entry price is not the sole determinant of its growth. Strategy and fitness should be the base.
Delayed creation of the portfolio
After the conclusion of the NFO period, the fund manager will need time for the invested sum to be invested. In case the markets rise during such a time frame, the early gains might not be reflected in the fund's value. Time risk can therefore impact performance in the initial phase.
Effect of Advertising
NFOs are considerably advertised and promoted. Investors may feel pressured into investing without checking whether the specific scheme meets their goals. Marketing-based decisions will often lead to a mismatch with financial plans.
Should you invest in an NFO
That will depend on your goals and, of course, risk appetite. If it is a new concept but fits into your scheme of things, then it is worth your consideration. If it is similar to schemes already available and performing, you can compare the two offers. Read the offer document and get the mandate understood. Knowing what NFO is helps to set clear expectations.
Conclusion
NFOs offer more choices but come with more uncertainty. There is no past performance, so people should rely on the mandate and risk level. The balanced approach helps. By knowing the merits and demerits, investors can decide if NFOs fit their needs.
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