How is mutual fund NFO different from an equity IPO?
Many mutual fund houses are coming up with new fund offers and financial planners believe that investors should consider them only if the scheme offers something new. However, an NFO is different from an IPO.
By Prashant Mahesh, ET Bureau | Updated:
Fund houses have started coming with new fund offers (NFO) in categories where they do not have a product to help them complete their product suite. Often they come up with a thematic NFO where they believe lies a long term opportunity.
- What is a new fund offer (NFO)?
A new fund offer (NFO) is a first time subscription offer for a new scheme launched by a fund house. The fund house could launch an NFO to complete their product basket to offer products in all categories to investors. For example, if an AMC does not have a equity saving fund or pharma fund, it could launch an NFO to offer that product to investors. Once the NFO is over, the fund will reopen for subscription again and investors have the option to subscribe on any working day at the prevailing net asset value (NAV).
- How is an mutual fund NFO different from an equity IPO?
Companies seeking capital for expansion, need to raise capital and often do equity IPOs. These are generally done by large privately-owned companies looking to become publicly traded. An NFO from a mutual fund just gets money from investors and allocates that in a basket of securities (stocks or bonds or government securities and so on), based on a stated strategy. IPOs are rarely done at face value with most of them at a premium to face value. On the other hand, an NFO from a mutual fund is always available at ₹10.
- Should investors put money in new fund offers?
Financial planners feel investors should invest in a NFO if there is a need for that product in their portfolio, or there is a theme which can be played through the new fund offer.Investors should avoid investment in an NFO merely because it is priced at ₹10, They should be aware of misselling by distributors who many a time sell such schemes compared to open end schemes which that higher NAVs which is wrong. Financial planners believe investors should prefer open-ended mutual fund schemes which have a past track record. This is because in an existing scheme, the portfolio and fund manager’s style of investing along with a past track record can be easily evaluated. In comparison to this, in a NFO one does not know what the portfolio will look like, how much assets the fund will gather and so on.