What are the key factors to consider before investing in NFOs?

New fund offers, or NFOs, are the flavour of the season. That could be the reason why asset management companies (AMCs) have launched 16 NFOs recently.

The rush by fund houses to launch new schemes comes after the markets regulator, Securities and Exchange Board of India (Sebi), set 1 July as the deadline for the implementation of a new system. It had in April banned the launch of NFOs until the new systems were in place.

Before the ban, Indian asset management companies had raised a total of 21,464 crore from 57 schemes, according to data available with industry body Association of Mutual Funds of India (Amfi).

The schemes on offer currently includes two open-ended exchange-traded funds (ETFs) launched by HDFC Mutual Fund on Monday.

According to the fund house, the benchmark of HDFC Nifty Next 50 ETF– Nifty Next 50 Total Returns Index (TRI) offers diversification benefits at both stock and sector level. Additionally, the benchmark of HDFC Nifty 100 ETF–Nifty 100 TRI offers exposure to the Indian large-cap space by focusing on top 100 companies based on full market capitalization.

ICICI Prudential Mutual Fund has launched Nifty 200 Momentum 30 Index Fund and Nifty 200 Momentum 30 ETF. The Nifty200 Momentum 30 Index constitutes of 30 companies selected from the Nifty 200 index based on their normalized momentum score.

Among other schemes on offer are two flexi-cap funds by Baroda BNP Paribas Mutual Fund and WhiteOak Capital Mutual Fund and a balanced advantage fund by Mirae Asset Mutual Fund.

Typically, fund houses launch a new fund to fill in a gap in one of the categories or launch a thematic fund when a particular sector or theme is doing well. An NFO is somewhat like a company’s initial public offer (IPO). An AMC issues fresh fund units for investing based on a particular theme, which could be large-cap, mid-cap, international equities or even bonds.

Many new investors in the market have an affinity for NFOs—they think that investing in NFOs is cheaper as these can offer better value than existing funds. Besides, a new fund is available at the price of just 10, which is its net asset value. However, experts say this is a wrong investment strategy.

“The biggest myth about an NFO is that it’s cheap. As an investor, you have to look at the price and valuations at which the fund house is investing in the current market,” said Rushabh Desai, founder of Rupee With Rushabh Investment Services.

Investors should also keep in mind that launching a new fund incurs a lot of expenses. A fund house often invests heavily in promotion and marketing of the new scheme and these expenses are ultimately passed on to the investor. These factors could actually make a new fund more expensive compared to an existing one.

Experts also suggest that, for funds based on themes such as flexi-cap, large-cap or small-cap, investors should stick with existing outperforming and consistent funds that are already in the market for at least three to five years and above. This allows investors to gauge the track record of a scheme.

Desai says he will recommend a new NFO only after a deep analysis. “For example, if there is an NFO with a unique theme, philosophy and reliable back-tested data, and if it fits in one’s portfolio, only then will I recommend it.”

“Investors should stick with their asset allocation,” he said.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.

More Less

Subscribe to Mint Newsletters

* Enter a valid email

* Thank you for subscribing to our newsletter.