Thinking Of Investing In A New Fund Offer? Here’s What You Need To Know

A 'new fund offer' is a first-time offer to investors to invest in a particular mutual fund scheme. This might seem to be similar to an initial public offering made by a company, but there are differences, which means that the investor also needs to have the right reasons to subscribe to the NFO.

There are certain things that need to be checked before one decides to invest in a particular NFO and some of these are highlighted below.

One of the first things that an investor has to check is the type of fund that is being launched.

Is there something unique or different in the fund? This should be at the top of the checklist because if a new fund is similar to others already in existence, then it is always better to stick with an existing one. The existing funds have a track record, and one is familiar with their way of operating, so these factors offer an element of comfort.

In addition, the investor can also see where their money is being invested because an existing fund will have a portfolio that can be viewed. This will not be possible in an NFO where the fund manager will construct a portfolio only after the initial money is collected.

If there is something unique about a fund in terms of its theme or style, then this can be considered if it is required for your portfolio as it can add the variety that is required.

The net asset value of the NFO, just because it is offered at Rs 10, should not be a consideration when choosing it for the portfolio.

A fund's par value might look lower when compared to an existing fund, but a mutual fund's performance depends on its portfolio. For a similar portfolio, the gains for a fund with a NAV of Rs 10 and Rs 100 will be similar in percentage terms. This is what the investor has to look out for, as the portfolio becomes the key factor that will determine whether the investment is worth the effort.

The actual or absolute NAV is not the factor that will determine the investment decision because it has no impact on future performance.

The NFO that is being introduced for a specific fund has to be checked to see whether the fund in question is open-ended or close-ended.

An open-ended fund allows investors to put their money in at any time, so there is no need to rush into the NFO until a track record has been established. Most equity-oriented funds are open-ended in nature. On the other hand, for some types of funds, like a Fixed Maturity Plan that is close-ended in nature, the NFO period might be the only opportunity to invest, and hence this needs to be used.

It is also seen that, as the end of the financial year approaches, the number of FMP launches increases.

A lot of mutual fund houses are introducing funds that have a different investment theme. This includes funds on the equity as well as the debt side. The investor has to decide whether this kind of theme is suitable for their portfolio and their needs.

For example, a niche fund looking to invest in a theme like climate change or having exposure to high-tech companies might not be suitable for your portfolio. In this case, there is no need to contribute to such a fund, and it is better to stay away. The exact opposite might be true, where a fund might exactly fit into the missing part of your portfolio.

This can be used to make a decision about investing.

Arnav Pandya is founder of Moneyeduschool

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.