Mutual fund companies launch NFOs with a lot of buzz and fanfare. Well, that’s their job. And in this video, we do ours with ETMONEY’s Shankar Nath looking into the construct of mutual fund New Fund Offers and explaining some myths & misapprehensions of this popular capital raising technique.

Topics covered in this video:
00:00 Introduction
00:39 What is an NFO?
01:54 NFO have No Track Record
03:51 An NFO is not like an IPO
05:12 NFOs are Costlier to Investors
06:56 An NFO at ₹10 is Not a Bargain
08:03 ETMONEY Opinion

💡Now you can enable Hindi Subtitles for this video by tapping on the CC button on your video frame.

👉 What is an NFO?

When an asset management company launches a new fund, it first opens it up for subscription for a few days to raise the initial money which allows the fund manager to buy stocks and shape the fund’s investment portfolio. This process is called an NFO or New Fund Offer.

NFO can be open for a maximum of 15 days post which most funds are converted into open-ended funds i.e. these funds can now accept fresh money or new investments. The only exception to this are close ended schemes where the NFO is the only time you are allowed to invest in these.

👉 NFOs have No Track Record

When selecting from existing schemes, you have the advantage of knowing the historical performance, rating, ranking, risk scores, portfolio of assets etc. However, none of this is available when it comes to mutual fund NFOs. In other words, NFOs are a shot in the dark.

Additionally, an NFO comes with inexperience because per the 2018 SEBI circular, an AMC can launch only one fund per category. This means if a mutual fund launches an NFO, it means they were not present in that category before.

ETMONEY’s advice is that if a fund is being launched in a category where a number of funds already exist, then it is prudent to pick a fund with an existing track record

👉 NFOs are not IPOs

An IPO or initial public offering is a process by which a company’s promoters offload a limited number of shares for purchase by the public.

So where the shares offered are limited in an IPO, the units offered in open-ended mutual funds keep on increasing as more investment or fresh money keeps rolling in.

Well, think of an IPO like a Mumbai where the land is restricted due to its geography and an NFO is like a Delhi which continues to find more land and keep on expanding.

👉 NFOs are Costlier

The mutual fund regulations in India allow a fund with a smaller AUM to charge a higher expense ratio as compared to a fund with a larger AUM.

Since most NFOs mobilize upto ₹500 crores, it means that these funds can charge around 2% in expenses. However established funds with over ₹20,000 crores in AUM have much lower expense ratios.

However we did find one exception to the rule. When the Central Public Sector Enterprises Exchange Traded Fund or CPSE ETF first came out in March 2014, it carried a rather unique proposition of a 5% discount. This made these attractive to retail investors which is however a rare exception.

👉 ETMONEY Opinion

An NFO is a marketing tool and marketers will use every gimmick to convince you to invest in them. Our opinion is that an NFO is a shot in the dark.

Now, you can invest in an NFO if there is a proposition which is new to market (like say, a Quant Fund) and if you truly believe in it. However we’ll still suggest that you let the fund play out for a few months before diving into it.

But when it comes to mainstream categories like large caps, multicaps, ELSS, midcaps etc., it is better to opt for an existing scheme that has a proven track record instead of going for something that new or unpredictable.

#ETMONEY #NFO #NewFundOffer

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