The markets are flooded with mutual fund NFOs. How to choose which mutual fund NFO to invest in?
Ratul C. De, Faridabad
Reply by Shashank Pal – Chief Business Officer, PL Wealth Management – Prabhudas Lilladher
This has been a perennial question in the minds of investors. Firstly, we should agree that the very decision of investing in a mutual fund should be kept independent of this, that is existing mutual fund schemes or NFO of a mutual fund scheme should not be the criteria.
A New Fund Offer (NFO) is defined as the initial offering of a scheme by an Asset Management Company (AMC). It occurs when a new fund is introduced, aiding the company in raising funds for acquiring securities. NFOs are time-bound, permitting investors to subscribe on a first-come-first-serve basis for a limited duration. Investors have the opportunity to invest in creative mutual fund schemes launched by the AMC at an early stage. For instance, certain schemes focus on newly launched or listed stocks, as well as Initial Public Offerings (IPOs).
One needs to look at this decision holistically from one’s portfolio perspective, that is his investment objective, risk profile, return expectation, investment horizon, asset allocation and his existing portfolio.
Usually, NFOs are able to garner significant AUMs for AMCs because of various reasons. NFOs are for a limited period and therefore there is a lot of focused high-level marketing activity and communications by AMCs around that product, creating heightened interest amongst the prospective investors.
There are also usually higher commissions or brokerages payable to distributors than the existing schemes. There are allocated marketing budgets, audio-video commercials, increasing awareness about the scheme making it relatively easy for distributors to sell the product. Ideally, investors should look at it from the perspective of asset allocation and fitment in their existing portfolio.
Investors also consider the economy, market, industry and sector life cycle or stage at which they are, the sector valuations and prospects, the targeted market cap, the fund house track record in managing similar products, the fund manager track record in managing similar or previous funds are also very important. The investment process to be adopted for creating the scheme portfolio and how it is different from its existing peers in the same category also needs to be considered.
Since it is definitely not an easy task for anyone to do so themselves, it is very important to consult their trustworthy financial advisors while choosing to invest in mutual fund NFOs.
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