ET Explainer: How to Understand New Fund Offerings and How to Invest in Them

In a context of booming markets and great interest from investors in equity-oriented investment funds, fund managers have prepared several new fund offerings. These new products belong to categories in which they do not have a presence or to themes that are currently attractive.

WHAT IS A NEW FUND OFFERING?

A new fund offering, or NFO, is a time-limited subscription call when a asset management company launches a new plan. The fund house offers a NFO for a category where it is not present to expand its offering. For example, if an AMC does not have a large-cap and mid-cap fund or a multi-cap fund, it launches an NFO for them. It is priced at ₹10 per unit. Since the NFO is for an open-ended product, the scheme will be reopened for subscription after the NFO period ends, and units will be allotted at the prevailing net asset value (NAV).

HOW IS A MUTUAL FUND (NFO) DIFFERENT FROM A STOCK IPO?

Companies seeking capital to expand or private equity funds needing an exit take the IPO route to raise money. If it is an offer for sale, the money goes to the investors make the sale, otherwise the company uses it as growth capital. IPOs are usually conducted by private companies seeking to go public. Mutual fund NFO, on the other hand, simply raises money from investors and builds a briefcase (stocks/bonds/government securities), based on a set strategy. For example, it could be a large-cap, mid-cap or multi-cap fund. Today, shares in an IPO are offered at a premium and rarely at face value. But, an NFO of a mutual fund is always available at ₹10. Unlike an over-supplied IPO, where an investor may or may not get an allotment, there is a confirmed allotment in an NFO of a mutual fund.

PRASHANT MAHESH SHOULD I BUY NFOS?

There is a high level of marketing around NFOs. Some of them offer exposure to new themes or sectors that are attractive to portfolios. However, financial planners Investors believe that they should build a long-term portfolio that includes assets like gold, fixed income and equities based on their needs, risk tolerance and long-term goals. They advise investors to buy NFOs only if their portfolios need them. Investors should avoid an NFO simply because it is available at Rs 10. Financial planners believe that investors should prefer open-ended mutual funds that have a track record of performance over NFOs. This is because in an existing scheme, one can easily assess the portfolio and past performance. However, in an NFO, the portfolio and the size of the scheme, among other things, are unknown.