New fund offers or Existing mutual funds—Where to invest?
Mutual funds are favorite investment option for many!
New fund offers Or Existing mutual funds… Where to invest?
Last month, we saw a number of different new fund offers coming in! Many investors invested in them!
They give exposure to the equity market for a new investor, diversify the portfolio, and 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 among new investors, let us understand what infuses various beliefs in the minds of investors.
New fund offers come with a fresh perspective.
Instead of investing in tried-and-tested old funds, investors think that ‘new fund offers’, come 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 perspectives or mindsets behind ‘launching that particular fund’ by the AMC.
New fund offers come with a wide choice of portfolios:
Along with this fresh perspective on portfolios, many new investors often feel that a wide choice of portfolio selection is available to these kinds of funds when they come with NFOs.
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 decision-making.
During the offer period of a ‘new fund offer’, promotional drives take place offline and online! Today, due to social media penetration, many new investors get to know about it. Their promotional drives impact the decision-making of the investors.
When reasons like these are common for new investors to choose, let’s see some more facts and features applicable to new fund offers and old existing funds.
New fund offers come with pre-approval from SEBI.
The Securities Exchange Board of India regulates the mutual fund industry.
When any NFO is launched, it is backed up by a detailed process by the respective AMC and a series of approvals from SEBI and assigned authorities.
It is never launched with some attractive, fancy, or objective offer.
It comes with predefined and approved categories and 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 for your risk appetite, goals, and tenure.
- It is not cost-friendly.
One of the main reasons to invest in the NFO is the people’s perception that it is cost-effective. Reason? Because it is available at an NAV of Rs 10.
People think that, considering the 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 the fund’s assets, liabilities, and number of units outstanding. It is never a direct price quoted as like’stocks’.
So, comparing it with the direct price is not justified.
Let’s understand this with the help of the following example:
| Particulars | New Fund offer | Existing fund |
| NAV (in Rs) | 10 | 100 |
| Growth | 10% | 10% |
| 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 the same, then NAV doesn’t matter.
- No listing gains:
Unlike IPOs, ‘NFO’s launched by mutual funds do not have any listing gains. They are open for a stipulated time and then get listed for investment. If the fund falls under the open-ended category, you can invest in it after the NFO period too.
On the other hand, for the NFO of a closed-ended fund, investors cannot invest in it after the NFO period.
NAV, however, doesn’t fluctuate much like the IPO price of a direct stock.
- There are 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 and information given in the same category of the mutual fund scheme under NFO, the suitability of the category, the type and objective of the scheme to our own risk appetite, and the and the investment objective and goal.
When we invest in existing funds, we get access to all past records and information that are there for a study regarding their risk management, returns, risk-reward ratios, comparison with their respective benchmarks, etc.
This information helps us make better decisions about investing because it helps us understand the foundation of the scheme.
New fund Offers are attractive and often launched for investment. With these factors in mind, you can invest in them thoughtfully!
Contact ARTHA FinPlan for more details.
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