As a slew of NFOs debut this month, go for a new fund only if it offers a unique investment opportunity.
Mutual fund companies are gearing up to launch new fund offers (NFOs) after the market regulator’s three-month ban on NFOs ended on July 1. The Securities and Exchange Board of India (Sebi) had banned asset management companies (AMCs) from launching NFOs until the new systems regarding the pooling of funds or units in mutual funds were determined and put in place.
Around seven AMCs have submitted offer documents to Sebi and would be launching the NFOs soon. Whiteoak Capital Mutual Fund has launched its first equity NFO Whiteoak Capital Flexi Cap Fund, an open-ended dynamic equity scheme investing across large, mid, and small-cap stocks. The fund aims to build an active, well-diversified portfolio, representing a cross-section of companies across major industries, economic sectors, and market cap segments. Subscription to the scheme closes on July 26.
Mutual fund companies launch NFOs to raise money from the public. The money raised is invested in securities like bonds and equity. Investors purchase units of the new scheme at Rs 10 and after the end of the subscription, the scheme is listed. Investors can then buy units at the prevailing net asset value (NAV) of the scheme. Typically, fund houses launch NFOs during a surging market as investors are comfortable investing when the markets are rising.
While investing in NFOs, investors get mutual fund units at a lower price. However, analyze the scheme before investing. In fact, a low face value does not mean that the scheme can show sustained performance as compared with other funds. The NFO can either be open-ended or closed-ended. In an open-ended NFO, one can enter or exit the investment at any point in time. On the other hand, in a closed-ended NFO, the investor cannot redeem the investment before the maturity period.
Check unique theme, asset allocation
Before rushing in to invest in an NFO, understand if it is offering a unique theme or investment objective. Moreover, the investment objective of the scheme must suit the risk profile of the investor and his long-term needs. Investors must analyze key information such as investment strategy, benchmark, asset allocation, level of risk, and liquidity before investing in an NFO. An investor must look at multiple parameters about the fund including the past performance and portfolio characteristics before investing in it. Analyze the cost of the NFO as certain schemes impose exit loads if you redeem units before completing a tenure of six months to one year.
As asset allocation will determine the range of assets—equity and debt — in which the new scheme will allocate the fund, analyze if the asset allocation suits your risk profile and long-term goals. Investors must look at the investment strategy of the scheme and understand if the NFO is offering a unique style and look at the benchmark to track the performance. Many a time, fund houses launch NFOs based on a sectoral theme which offers limited scope for diversification. Investors must note that the sectoral theme is sustainable in the long run.
What should you do?
Experts suggest that it is always better to invest in an existing scheme that has a proven long-term track record instead of a new fund. However, if the investor feels that a particular NFO suits his investment profile and has a compelling reason to invest, then he can invest a smaller quantum at the time of the NFO and gradually buy more units if the scheme performs well in the future.
Saying yes to NFO?
— It is always better to invest in an existing scheme that has a proven long-term track record instead of a new fund — Invest a smaller quantum in an NFO and buy more units if the scheme performs well later— See whether the scheme’s investment objective suits your risk profile & long-term needs— Analyse the NFO’s level of risk, investment strategy, asset allocation, and liquidity norms