NFOs flooding market, but is it right for you?
This pace of NFOs is likely to increase in the coming months. But what are NFOs, why are mutual fund companies emphasizing on launching NFOs, and should one invest in these NFOs?
The mutual fund industry in the country is growing rapidly. Figures from AMFI show that in April 2024, the size of this industry increased by 38 percent compared to last year, crossing Rs 57 lakh crore (Rs 57.26 lakh cr). In April 2023, the asset under management (AUM) of the mutual fund industry was Rs 41.62 lakh crore. During this period, the number of unique investors increased by 19 percent to 4.5 crore from 3.8 crore.
New Fund Offers (NFOs) have made a special contribution to the growth of the mutual fund industry. In the calendar year 2024, 10-12 NFOs are being launched every month. More than 65 NFOs have been launched so far this year. This pace is likely to increase in the coming months. But what are NFOs, why are mutual fund companies emphasizing on launching NFOs, and should one invest in NFOs? Let’s understand.
What is NFO
When a mutual fund company launches a new scheme for subscription for the first time, it is called a New Fund Offer (NFO). NFOs help mutual fund companies raise capital. Generally, the price of an NFO is fixed at Rs 10 per unit.
Certified financial planner Sachin Parekh says that for the last two years, market sentiment has been strong. When the market is bullish, mutual funds also launch more NFOs to raise more money. Another big reason is that when a particular theme comes into focus during a bullish market, all companies start launching similar schemes. Invest in an NFO only if you need a specific fund in your portfolio. If you already have a fund in that category, it doesn’t make sense to invest in the NFO.
Sectoral funds
When the economy is doing well, economic activities increase. In such scenarios, sectoral funds tend to deliver better returns compared to ETFs or index funds. Keeping this in mind, AMCs are launching NFOs themed around manufacturing, PSUs, and defence sectors. Moreover, retail investors are now willing to take higher risks. Perhaps for this reason, investors are pouring money into high-risk schemes like thematic or sectoral funds in large numbers. The biggest positive is that mutual fund companies are receiving good investments, making the NFO market flourish.
No past history
Keep in mind investing in NFOs carries risks. Unlike existing mutual funds, NFOs don’t have a past performance track record, making it difficult for you to estimate asset allocation and risk. Additionally, you don’t know how the fund manager will utilise your money. In such a scenario, assessing the success of the fund can be challenging. For this reason, some experts advise against investing in NFOs.