Mutual funds are favorite investment option for many!
Last month we saw number of different new fund offers coming in! Many investors invested in them!
They give exposure to equity market for a new investor, give diversification to the portfolio, help us achieve our goals too!
Though people choose to invest in mutual funds, many still remain undecided about whether to invest in ‘New fund offers’ or ‘Existing mutual funds’.
Where, this is a common phenomenon within new investors, lets understand what infuses various beliefs in the minds of investors.
- New fund offers come with fresh perspective:
Instead of investing in tried & tested old funds, investor think that, ‘new fund offers’, comes with fresh objectives.
They offer these objectives as per the category they come from. E.g. in a sector or thematic category, one can think of these fresh kind of perspectives or mindset behind ‘launching that particular fund’ by the AMC.
- New fund offers come with wide choice of a portfolio:
Along with this fresh perspective of portfolio, many new investors often feel that wide choice of portfolio selection is available to these kinds of funds when they come with NFO.
With NFO, many feel that ‘stock selection’ will not be repetitive and will be done with a fresh outlook as per the scheme objectives.
- Promotion of the NFO impacts the decision making:
During the offer period of a ‘new fund offer’, promotional drives take place offline & online to! Today, due to social media penetration, many new investors get to know about it. Their promotional drives impact decision making of the investors.
When reasons like these are common for new investors to choose, let’s see some more facts & features applicable to New fund offers & old existing funds.
- New fund offers come with pre- approvals from SEBI:
Securities Exchange board of India regulates Mutual Fund industry.
When any NFO is launched, it is backed up by detail process by respective AMC & series of approvals from SEBI & assigned authorities.
It is never launched with some attractive or fancy offer or objective.
It comes with predefined & approved categories, objectives by SEBI.
- It can offer you to fill up the gap in your portfolio:
If you are a mutual fund investor and have your own portfolio of different types of schemes, then ‘new fund offer’ can offer diversification to your portfolio. However, you must consider its suitability to your risk appetite, goal & tenure.
- It is not cost friendly:
One of the main reasons to invest in the NFO is the peoples’ perception that NFO is cost effective. Reason? because it is available at NAV of Rs 10.
People think that, considering high NAV of other existing mutual funds, this low-cost NAV will have high return potential.
But, please note that Net asset value i.e. NAV is the ratio denominating fund’s assets, liabilities & no of units outstanding. It is never a direct price quoted as like ‘stocks’.
So, comparing it with direct price is not justified.
Let’s understand this with the help of following example-
|Particulars||New Fund offer||Existing fund|
|NAV (in Rs)||10||100|
|Period||5 Years||5 Years|
|NAV considering the growth after 5 years||11||110|
In the above hypothetical example, it is shown that, if the growth of two funds is same, then NAV doesn’t matter.
- No listing gains:
Unlike IPO, ‘NFO’ launched by mutual funds do not have any listing gains. They are open for a stipulated time & then get listed for investment. If the fund comes under open -ended category, you can invest in it after NFO period too.
On the other hand, for NFO of a closed-ended fund, investor can not invest in it post NFO period.
NAV however, doesn’t fluctuate much like that of IPO price of a direct stock.
- No past records to show
An NFO doesn’t have any past records of the performance to show. We need to invest based on the scheme related documents & information given in the same, category of the mutual fund scheme under NFO, suitability of the category, type & objective of the scheme to our own risk appetite, investment objective & goal.
When we invest in existing funds, we get access to all past records & information which are there for a study wrt its risk management, returns, risk-reward ratios, comparison with its respective benchmark etc.
This information helps us to make better decisions about investing because it helps us to understand the foundation of the scheme well.
New fund Offers are attractive & often launched for investing. With these factors in your mind, you can invest in them thoughtfully!