“Mutual Funds are subject to market risks. Please read all scheme-related documents carefully before investing.” Most of us have heard this line so many times on TV that by now it is ingrained in our memory. But, how often do we take it seriously? Mutual funds may be a safer investment option as compared to equities due to their risk diversification quality, but are all mutual funds safe?
New Fund Offerings, or NFOs as they are called, are first-time subscription offers for a new scheme that has been launched by an asset management company. NFO is similar to the initial public offer (IPO) with an attempt to raise capital from the market. NFOs are offered for a stipulated period. This means that the investors opting to invest in these schemes at the offer price (in most cases the offer price is fixed at Rs 10) can do so in this stipulated period only. After the NFO period, investors can take exposure in these funds only at the prevailing net asset value (NAV).
NFOs have recently opened up again for the public in July after an embargo or a temporary ban put on them by SEBI for the last 3 months as the regulatory body wanted these instruments to be more public-friendly.
IPOs have a certain frenzy around them, especially if the company floating an IPO is a popular one. But, what about NFOs? Are they safe to invest in? Should you put your money into one? If yes, how do you know which NFO is a good one to invest in?
To answer these questions, we were joined by Santosh Navlani, COO of ET Money. He said, “When you are investing in any product, you need to weigh your alternatives and see what is best for you. When it comes to Mutual Funds, you have thousands of options to choose from and about 36-37 schemes by fund houses. When you are looking at any NFO, be it a passive fund, a factor fund, or a traditionally-managed fund, it is not something new. Some or the other fund house will have a scheme like that.”
He advised against investing in NFOs, and said that when an NFO is launched, all the investor has to go by is the scheme brochure. There is not much clarity for the investor to make a weighed decision. “You’re buying into a leap of faith,” is what he said for people looking to invest in an NFO.
There is a hard sell when it comes to NFOs. Many a time the distributors in the market sell the fund by pitching it as a new fund, available for only Rs 10. They paint a picture of a 50x growth for the investor, which people tend to fall for more often than not. He pointed out the difference between an IPO and an NFO issue, by saying that an IPO has a fixed number of shares issued to the public, while an NFO does not, and fails to work on the demand-supply principle affecting its value.
Another thing he pointed out about NFOs is that open-ended NFOs can also be purchased after the 15-day period, and one need not rush to buy them without adequate research and understanding of the instrument. Instead, he advised investing in funds that have factors such as low volatility, value for money, steady momentum and brand quality. He added that these factors can be used individually or in combination with each other to create a quality basket of stocks that may assure positive returns.
