Investing in New Fund Offers? Here are Things You Should Closely Look At...

Aug 21, 2021

Listen to Investing in New Fund Offers? Here are Things You Should Closely Look At...

00:00 00:00

The Indian equity markets have recovered to a large extent from March 2020 lows, which was caused by the uncertainties due to the COVID-19 pandemic. By the end of 2020, market indices were hitting record high. A broad-based rally was witnessed in the market and bellwether S&P BSE Sensex and NSE Nifty 50 indices are now at a new all-time high.

The mutual funds industry has made the most out of the bull run in the capital market. It not only generated optimal returns, but has also overloaded the market with the launch of new fund offers. To attract good inflows, many fund houses have launched a slew of new fund offers, especially after the superior returns delivered by most equity-oriented funds over the last one year period.

In order to take advantage of the investors' sentiment in a rising market, several Asset Management Companies (AMCs) have launched new fund offers in various categories. The three main categories are passive funds, sectoral/thematic funds, and international fund of funds.

Fund houses launch new funds for various reasons, such as filling the gaps in their existing basket of product offerings. Some fund houses are known to launch new funds that are 'flavour of the season' that can gain traction. For instance, the recent launch of sectoral/thematic NFOs include Healthcare, Technology, ESG investing, international FOFs, etc. When markets are at their peak and most investors are optimistic about market conditions and economy, the fund houses are able to capitalise on the prevailing sentiment.

Image source:

However, the real question here is... Are these New Fund Offers worthy investments?

Mr NS Venkatesh, CEO at Association of Mutual Funds in India (AMFI), said, "The mutual fund industry has established a strong digital connect with investors during the COVID-19 pandemic and this has not only widen the reach but also attracted new investors."

This increase in mutual fund investments digitally has attracted a good inflow in various categories of mutual funds. Considering the burst of new fund offers from several well-known fund houses, it's natural to be carried away and invest in these NFOs. Given the sheer number of new fund launches, investors must carefully use their investment discretion, as not all NFOs may be a good fit. You need to take special care while planning to invest in any new fund offers.

Here are some important points to be noted while considering to invest in New Fund Offers:

1. Background check of the Fund House

The primary aspect to consider when investing in NFOs is to analyse the reputation of the fund house that has launched it. You need to assess the performance of the fund house across markets and amongst its peers. The fund house should have at least 5 years and above operating experience in the mutual fund industry. Above all, it should follow prudent investment processes and adhere to scheme's mandate.

New entrants in the mutual fund industry usually have less experience as compared to the existing fund houses that have survived various market cycles. You must analyse the performance of the fund house and the performance it has delivered during various phases of the markets. If it has a proven track record, then there is a possibility that the NFO will be managed prudently and may perform well.

2. Fund objectives

The new fund offers are launched along with scheme related information in the documents such as Scheme Information Document (SID), product presentation, etc. These documents highlight the main objectives of the fund, the asset allocation, investment strategy, benchmark index, level of risk, liquidity, fund management team, and other relevant information.

You need to read all the scheme related documents carefully to develop a perception of the viability of the NFO. In simple words, the offer documents are provided to help potential investors understand the investment process and how the fund manager/s will manage the invested amount. Do note that, your investment goals must align with the mutual fund's objectives to make it a worthy investment for your portfolio.

3. Risk profile

The most important aspect to consider before investing in any NFO is to ensure your risk tolerance. Investing in NFOs can be a risky proposition because it does not allow you to readily check the performance track record like you would with existing funds. Ensure that your risk appetite balances with the fund's risk profile.

You should not invest in any NFO that indicates high risk when your risk tolerance is moderate to low. Hence, it is crucial to analyse the risk factor before investing in NFOs. In addition, check if your portfolio is capable of surviving the market volatility as well.

4. Investment Horizon

The investment horizon plays an important role when you invest in NFOs, as some have lock-in-periods wherein you are required to stay invested for a specific tenure. This means, you may be unable to redeem it before maturity; and you could be charged an exit load. Evaluate these aspects carefully before investing in NFOs and ensure that your investments are in-line with your investment horizon and goals.

5. Minimum Subscription Amount

The new fund offer sets a certain investment restriction with a minimum subscription amount constraint. The minimum investment amount is clearly mentioned in the SID and the application form. It may range from as low as Rs 500 to Rs 5,000. In case, if the minimum subscription amount is higher than what you planned, you can consider opting for the Systematic Investment Plan (SIP), if it is available in the particular NFO.

6. Cost of Investment

An overall cost involved in investment is one of the factors that weigh on your potential returns. Most of the NFOs do not have any entry load, but some do charge an exit load. It is deducted from the total redemption amount, which includes your returns, if you redeem before the desired tenure of investment.

Another element that may affect your returns is the expense ratio. It is the annual fees charged to manage your money invested in the fund. Ensure the fund has a lower expense ratio, as per the SEBI norms.

7. Theme of the NFO

The new fund offers are launched with various themes and investment strategies. Check that the theme is sustainable and offers diversification to your portfolio. Read the scheme related information carefully to understand the fund's theme and ensure its suitability for your investment requirements.

If the NFO is holding a type of scheme that your investment portfolio already holds and does not add any diversification to your portfolio, it may not be a viable worthwhile option for you. Ideally, invest in a New Fund Offer that fills a void in your portfolio.

The investment strategy helps in diversifying your portfolio across asset class, sectors, and market caps as well as offers a favourable risk-reward ratio. From an investment perspective, it makes sense to invest in NFOs offering a unique strategy that is presently unavailable in the industry and has the potential to deliver the returns in accordance with your risk profile and investment horizon.

Therefore, you may consider investing in any New Fund Offers only if it adds value to your portfolio. Alternatively, you may stick to investing in existing mutual fund schemes that have a proven performance track record with consistent returns.

PS: If you wish to select worthy mutual fund schemes, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

As a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

PersonalFN's recommendations pass through our stringent process that assesses both quantitative and qualitative parameters, providing you with Buy, Hold, and Sell recommendations on equity and debt mutual fund schemes. Read here for more details...

Frequently Asked Questions (FAQs)

1. What is a New Fund Offer?

A New Fund Offer refers to the introductory offer of a scheme launched by a fund house. It is a first-time subscription to the initial sale of fund shares issued by an investment company to investors.

2. What is the advantage of investing in NFO?

NFO is available at face value of Rs 10, which is lower than the Net Asset Value of the fund. This difference between NFO at face value and fund at NAV can sometimes be highly rewarding.

3. Should I invest in a NFO?

You should invest in New Fund Offers only if it helps to diversify your portfolio across asset class, sectors, and market caps as well as offers a favourable risk-reward ratio.

4. How to invest in a NFO?

You can invest in a NFO via online investing through various websites or apps. You may reach out to your financial adviser / mutual fund distributor for guidance.

5. What are the documents related to NFO?

Before investing in a NFO, you must carefully study the scheme related documents, which includes SID, Product presentation, KIM, and other related information.

Happy Investing!


Warm Regards,
Mitali Dhoke
Jr. Research Analyst


Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

Add Comments