Should you invest in an NFO?

Over the last three years, 118 new open-ended schemes were launched by mutual fund companies. This also includes new Exchange-Traded Funds (ETFs). There are two reasons for the rise in New Fund Offers (NFOs) in this time period. One, equity markets have been on a bull run over the last three-four years, attracting new investors looking for opportunities to invest at reasonable prices.

Two, asset management companies are diversifying their product mix with new themes such as consumption, digital, commodity funds and arbitrage funds and are looking to attract investors with offers based on these themes.

First-time subscription An NFO is a first-time subscription offer for a new mutual fund scheme. An investor can buy the units at a fixed rate of ₹10 per unit during the subscription period.

There are two types of NFOs — close-ended fund and open-ended fund offers. In a close-ended fund, investors can buy the units only during the new offer or subscription period. They should also stay invested in the same for the lock-in duration, which is generally 3-3.5 years.

On the other hand, in an open-ended fund, investors can buy or sell the units even after the offer period is ended.

NFOs are an investment opportunity for those seeking new themes or different asset classes In late 2015, Tata AMC launched five NFOs, including Tata India Consumer Fund, a consumption-oriented fund that has delivered excellent returns of 38 per cent over the last one year.

Themes such as banks, arbitrage opportunities, fixed income securities and Nifty & Sensex ETFs are doing well. However, over the past one year, the pharma theme has been an underperformer.

Good returns from these thematic funds are attracting investors like Ashwini V towards NFOs. “I have been investing for more than two years now through Zerodha’s COIN. I invested in two mid-cap funds last year and have made gains of more than 15 per cent in a year. The rally in the markets has also helped such funds gain extraordinary returns. I am planning to invest in open-ended NFOs,” says Ashwini, manager with a private firm.

Pointers to keep in mind When it comes to mutual fund investing, people just start a Systematic Investment Plan (SIP) or a lumpsum investment. As years pass, they come across the term NFO and wonder what it is and how it works.

Take the case of Tejas Gowda, a software engineer from Bengaluru who has been investing in a mutual fund over the last one year but is not aware of NFOs. “I have been investing in two mutual fund schemes for the past one year through SIP (Systematic Investment Plan). However, I don’t have a clear idea about investing in NFOs and so I am sticking with the existing funds.”

For new and young investors like Tejas, here are a few pointers to keep in mind while investing in an NFO.

a) Lack of track record: NFOs don’t have a proven track record to evaluate the fund unlike other existing funds which have track records. So, one should make sure to read the scheme information and other related documents before investing in an NFO. Though past performance is not indicative of future returns, the historical performance of the fund house and the fund manager does play a role in selecting the NFO.

b) Not cheaper : The NAV (net asset value) of an NFO being ₹10 does not mean that it is cheaper than its peer funds. Moreover, the growth of the NAV in any scheme depends on the portfolio it holds.

c) High initial expenses: The expense ratio could be higher in the initial years as the fund faces expenses such as marketing & promotion and commission to its distributors. However, investors have an option to bypass the expense cost. To do so, they can consider investing through a direct plan in an NFO rather than opting for a regular plan.

Recent NFOs ICICI Prudential AMC recently came up with a close-ended NFO, ICICI Prudential Value Fund – Series 18.

DSP BlackRock plans to launch DSP BlackRock Equal Nifty 50 Fund, the first passive fund. A passive fund is similar to ETFs but is launched by fund houses with the objective of closely corresponding to the total returns of securities as represented by the underlying index, subject to tracking error. Unlike ETFs, these are not traded on the exchanges.

Banashree Chowdhury, Senior Editor, Indecomm Global Services, says, “I would like to invest in DSP BlackRock Equal Nifty 50 Fund, as the fund doesn’t have any bias and follows an equal weight index strategy, which means that all stocks have equal weight in the index.”

ETFs and ELSS In the last three years, 29 ETFs were launched. These ETFs are passively managed funds that track or replicate an index or a commodity like the Nifty or Sensex-based ETFs and gold ETFs.

Over the past three years, there has been an increase in Nifty as well as Sensex-based ETFs, while there have been no launches of gold ETFs as the asset class is underperforming currently. Interestingly, Banking ETFs have also attracted new investors and have delivered an excellent return of 26 per cent over the last one year. Kotak Banking ETF, Edelweiss ETF - Nifty Bank and SBI ETF Nifty Bank delivered one-year return of about 26 per cent.

Six ELSS mutual funds were launched over the last three years, with the objective of providing long-term returns. Among them, Mirae Asset Tax Saver Fund and Tata India Tax Savings Fund have delivered good one-year returns. However, these funds are open-ended and come with a lock-in period of three years.

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