Despite the turbulent times in a volatile market, mutual funds have not lost their sheen and relevance for individual investors like you!
Over the past year, the mutual fund industry witnessed a record inflow of funds, primarily through SIP accounts. In a booming market, mutual funds are likely to attract more and more investors by launching new fund offers. A ''New Fund Offer'' (NFO) launch usually revolves around a specific investment theme or exotic investment objective and is aimed at raising fresh funds by any asset management company. At Rs. 10/- a unit, an NFO mutual fund can sound like an attractive investment opportunity.
But is it the best way to invest in Mutual Funds? Well, honestly, it depends. So let'slet's see the pros and cons of an NFO before concluding!
First things first - NFO and IPO are two entirely different things. If you compare the two, there's no similarity, and it'll get you nowhere! Any mutual fund, including an NFO, is aimed at pooling money from investors that, in turn, gets invested in equities. The base NAV of an NFO is kept at Rs. 10/- to simplify the initial unit allocation and keep accounting purposes in mind. Unlike an IPO, Rs. 10/- doesn'tdoesn't mean the NFO is intrinsically-valued, for, at present, it doesn'tdoesn't hold any stocks.
Each New Fund Offer document specifies an investment objective that offers to invest in stock markets and is based on themes like banking and financial, pharma, technology stocks, etc. It can also be goal-based, such as retirement funds, children's funds, or offer to invest in stocks based on their market capitalization (small/mid/large-cap funds). Most of the offer documents you come across might sound very interesting and attract you to invest. Deciding to invest in an NFO is not a bad idea. But it would help if you were careful in choosing the funds, and unless you find an attractive investment opportunity, it's always wise to stick with proven funds. So let'slet's understand the pros and cons of an NFO that might help you make the right decision with an upcoming one!
Pros
- Credible Fund Manager:
A good Fund Manager is one of the most important aspects of investing in mutual funds, especially NFOs. A Fund Manager with a proven track record that has sailed through different market phases is a plus for any NFO. A New Fund Offer is like starting with a clean slate! The fund manager chooses which stocks to invest in based on the investment strategy. It allows the fund manager to undertake well-researched calls and follow the latest market trends, allowing rapid growth in the fund's NAV.
- Staggered Buying Opportunity During a Downturn in the Market:
It's simple math! Buying low averages your cost, allowing you to generate higher returns when the stocks rise. A well-established fund will have deployed all the pooled funds and won't be able to make fresh additions to its portfolio.
However, with NFOs, things work out differently at the start! The entire amount collected during the launch of an NFO is deployed in around 3-6 months. A bear market would be the best time to invest in NFOs. This is because the funds are deployed in a staggered approach, allowing the fund manager to make new purchases at lower rates, eventually averaging the investment cost!
Cons
- An NFO can be a Risky Investment:
When investing in a mutual fund, you're essentially investing in a fund's ability to generate wealth. Such judgment can only be derived from a fund's past performance.
How has it performed in different market cycles? Is the stock-picking strategy successful? These are some questions that Redhat's impossible to answer with an NFO as there's no track record. You anchor your decision on just the name of an asset management company and the capabilities of the assigned fund manager. It takes a few years to build up a proven track record, and the New Fund Offer falters during that period, risk losing your money or at least some of it. So only invest in an NFO if there's at least one strong factor. It could be an exotic investment opportunity, an extremely successful fund manager, or you have a high-risk appetite.
Even the most successful mutual fund started with an NFO once. It's not a definite ''Yes or 'No' decision to make. Neither is there a formula that helps you derive the successful outcome of an NFO. You ought to consider the above factors and, most importantly, have the risk appetite to bear with the fund during turbulent times. So research, choose smartly, and always choose a unique investment strategy that backs up your financial planning.
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