Factors to be considered while investing
in a new fund offer
A new fund offer (NFO) is the first-time subscription offer for a new scheme launched by a fund management company.
In other words, it is an invitation to investors to subscribe to the units of a newly launched fund.
During the NFO period, investors can buy the fund units at the base net asset value (NAV) of Rs 10 per unit.
In the case of closed-ended funds, they stop accepting subscription requests once the NFO period is over.
In an open-ended fund, units can be purchased and sold on a continuous basis even after the initial offering.
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(Posted date - 4 Sept 2012)
A NFO must not be confused with an IPO
A mutual fund NFO must not be confused with a capital market initial public offering (IPO), although both represent attempts to raise money. The NFO price is generally close to the fair value of the fund.
This is because the NFO has not yet invested in any stock or debt. During this period, it is simply accumulating money from investors before starting the investing process.
On the other hand, the IPO price can be more or less than the fair value of the company. Companies usually offer their shares at a premium since their future business plans can be assessed with some degree of certainty.
Thoroughly analyse the new scheme before investing
One of the biggest misconceptions among investors is that units are available at a cheap price during the NFO period and, hence, it is better to invest at a lower NAV.
However, investors must thoroughly analyse the new scheme before rushing to invest money as soon as an NFO opens. It is the growth rate of NAV that matters rather than the value of NAV.
The growth of two funds-say, one with a NAV of Rs 40 and the other with Rs 10-will depend on the quality of financial instruments like stocks and bonds in which these two funds have invested..
Carefully go through NFO's draft prospectus
There is no basis of investing in a fund that has a lower NAV. The other important consideration is an NFO's draft prospectus.
Go through it carefully because it contains vital information on the investment objective of the fund, the risk profile and expenses.
Study the investment policy of the new fund because it contains the types of sectors or stocks (large-, mid-, small-cap, value or growth stocks) that the fund will invest in.
In addition, the risk factors involved, especially scheme-specific factors, should be given due consideration. Such risks include limited diversification, say, concentration in a particular sector or in specific capitalisations like mid-cap or small-cap.
A careful evaluation of expenses is necessary
The other factor to be considered is the expenses, which include recurring ones, initial issue expenses, loads, etc.
If there are adverse variations in the estimated expenses for the scheme on offer and actual expenses for other similar schemes in the past, the reasons for these variations should be clearly explained.
It is also imperative to check the history of the asset management company launching the NFO and that of the fund manager. Ask about the kind of funds they are managing and their performance.
The qualification and experience of the fund manager play a vital role in the fund's performance. As NFOs are new funds, a quantitative analysis of past performance is not possible. Therefore, they can prove risky if not assessed carefully.