NFO vs existing mutual funds: Which one should you choose

Investing in mutual funds is a popular choice for individuals looking to grow their wealth. While many investors prefer well-established mutual funds, others explore opportunities in New Fund Offers (NFOs). Both options have their benefits and risks, and understanding their differences can help investors make informed decisions.

This article will explain what an NFO is, the types of NFOs, how they differ from existing mutual funds, and the factors to consider before investing in either. By the end, you’ll have a clear understanding of which option suits your investment goals.

• Table of contents

1. Understanding NFO
2. Two types of NFOs
3. NFO vs existing mutual funds
4. Pros and cons of NFOs
5. Keep this in mind before investing in an NFO
6. Why you should invest in NFOs
7. Why should you invest in existing mutual funds
8. Pros and cons of existing mutual funds

Understanding NFO

A New Fund Offer (NFO) is the first-time launch of a mutual fund scheme by an asset management company (AMC). During this phase, investors can buy units at a fixed initial price. The AMC collects funds from investors and invests them in stocks, bonds or other securities based on the fund’s strategy.

NFOs allow investors to participate in a mutual fund from the beginning, often with innovative themes or strategies. However, they come with uncertainties since there is no past performance to assess. Investors should evaluate the fund’s objective, asset allocation, and AMC’s reputation before investing.

Two types of NFOs

Open-ENDED NFOs

Open-ended New Fund Offers (NFOs) allow investors to enter and exit at any time after the NFO period closes. These funds provide liquidity and flexibility, similar to regular mutual funds, as investors can buy or redeem units based on the fund’s Net Asset Value (NAV). This makes them suitable for those seeking convenience and accessibility.

Closed-ended NFOs

Closed-ended NFOs have a fixed maturity period, meaning investors cannot withdraw their funds before maturity. Once invested, they must stay until the fund matures, unless the fund is listed on a stock exchange allowing them to sell units to other investors.

NFO vs existing mutual funds

Historical performance

Existing mutual funds have a performance track record that helps investors analyse past returns, risk levels and overall consistency. On the other hand, New Fund Offers (NFOs) lack historical data, making it difficult to evaluate their potential.

NAV (Net Asset Value)

An NFO begins with a fixed NAV. Existing mutual funds, however, have fluctuating NAVs based on their portfolio performance and market conditions.

Market risks

Since NFOs launch with a newly created portfolio, they carry higher uncertainty. Existing mutual funds have an established investment strategy and past market performance, helping investors make informed decisions.

Investment strategy

The strategy of an existing mutual fund is already known and tested, whereas an NFO may introduce a new and unproven investment approach, increasing unpredictability.

Liquidity

Open-ended mutual funds allow easy buying and selling, providing liquidity. However, closed-ended NFOs require investors to remain invested until maturity unless traded on the stock exchange.

Pros and cons of NFOs

Pros

Low initial NAV: NFOs start with a low Net Asset Value (NAV), usually set at Rs. 10 per unit. This allows investors to enter at an affordable price, potentially benefiting from future growth.

Unique investment opportunities: Some NFOs introduce new investment themes, sectors or strategies that may not be available in existing mutual funds. This gives investors access to fresh market opportunities and innovative financial products.

Diversification: NFOs can help investors diversify their portfolios by adding exposure to new asset classes, sectors or market trends that existing funds may not focus on.

Cons

No performance history: Since an NFO is newly launched, investors cannot analyse past performance or risk-adjusted returns, making investment decisions more uncertain.

Higher risk: NFOs come with uncertainty as their success depends on the fund manager’s expertise and market conditions.

Liquidity constraints: Closed-ended NFOs do not allow withdrawals before maturity, limiting investor flexibility unless listed on a stock exchange.

Keep this in mind before investing in an NFO

Investment objective: Before investing in an NFO, ensure that its objective matches your financial goals, whether growth, income or stability.

Fund manager’s track record: Research the fund manager’s experience and past performance to understand their expertise in handling investments. A skilled manager can significantly impact returns.

Fund category: Identify whether the NFO is an equity, debt or hybrid fund. Choose one that aligns with your risk tolerance and investment strategy.

Expense ratio: Some NFOs may have higher initial charges, which can impact returns. Compare costs before investing.

Market conditions: The success of an NFO depends on prevailing market trends. Assess whether it’s the right time to invest.

Why you should invest in NFOs

• If you want to invest in a unique theme or sector not covered by existing funds.
• If you are a long-term investor willing to take calculated risks.
• If you trust the fund house and fund manager’s expertise.

Why should you invest in existing mutual funds

• If you prefer stability and historical performance as a guide.
• If you seek liquidity and the ability to redeem units at any time
• If you want to invest based on proven market trends.

Pros and cons of existing mutual funds

Pros

Historical performance data: Existing mutual funds have a track record, allowing investors to analyse past returns, risk levels and consistency before investing.

Lower risk: Since these funds have a defined investment strategy and proven performance, they are generally less risky than new funds.

Liquidity: Open-ended mutual funds allow easy buying and selling of units, offering investors flexibility to enter or exit anytime.

Cons

Higher NAV: Since these funds have already grown, their NAV is higher, which may impact short-term gains for new investors.

Limited innovation: Existing funds may follow traditional investment strategies and may not introduce new themes or sectors like some NFOs do.

Conclusion

Both NFOs and existing mutual funds have their advantages and risks. While NFOs provide opportunities for diversification and unique investment themes, existing mutual funds offer stability and a proven track record. Your choice should depend on your investment goals, risk appetite and market research.

FAQs:

Is investing in an NFO riskier than an existing mutual fund?

Yes, investing in an NFO is riskier than an existing mutual fund because it has no past performance to evaluate. The fund’s success depends on market conditions and the fund manager’s strategy. On the other hand, existing mutual funds have a track record, making them more predictable and less uncertain for investors.

Can the high NAV of an existing mutual fund impact my returns?

No, returns depend on percentage growth, not the NAV value.

How important is market timing when investing in an NFO?

Market conditions can impact an NFO’s performance, but a strong fund manager and strategy matter more.

Are existing mutual funds better for risk-averse investors?

Yes, as they provide historical data and lower risk compared to NFOs.

What should I consider before investing in an NFO?

Look at the fund’s objective, fund manager’s experience, and market conditions.

How does market saturation affect existing mutual funds?

Highly saturated markets may limit future growth potential, impacting returns.

What does a performance plateau in a mutual fund mean?

It means the fund's returns have stabilised, indicating limited future growth potential.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.