1. What are NFO's?
NFO stands for New Fund Offer. Under NFO, when a new fund is launched it is offered to public for subscription and raise capital from the market in order to invest their money in shares, govt. bonds, etc.
NFO and IPO (Initial Public Offering) might seem similar terms, however they are different, the main difference is that through IPOs direct stocks of company are launched and through NFO's new Mutual funds are launched in the market. NFO's are sold on the Net asset value whereas IPOs offer stocks on the stock price.
Due to SEBI’s discouragement, not too many Mutual Fund Schemes can be owned by a Fund House, and so NFO's of Open Ended Funds have become very less and most of the NFO's in the market are in Close Ended Funds.
For Example: L&T Emerging Opportunities Fund - Series 2 (A Closed Ended Equity Scheme) was open for subscription on 7th June, 2018.
2. Should I Invest in NFO's?
May be, for Passively Managed Funds. If any new ETF is getting launched, which has lower expense ratio than existing or is tracking a new asset like Silver or Platinum for which there are limited existing investment options, then you may opt for such NFO's based on your preferences.
Even if there is an NFO, you should avoid investing in such schemes due to following reasons:
i. They have no proven track record.
ii. Most of the times such funds come with higher Expense ratio as their initial marketing cost etc. is higher.
iii. They are not cheaper than already existing funds. This is a myth, that Rs. 10 NFOs are cheaper than their existing peers as the NAV of the later would be higher and hence lesser units would be bought for the same cost. This is totally wrong. Your returns depend only on the percentage growth on NAV, based on the portfolio of that fund. So hypothetically, if there are two funds with exactly same stock portfolio A & B. A is an NFO with NAV of Rs. 10 whereas B has been in the market for 10 years and has NAV of Rs. 200. Then if underlying portfolio increases by 10% in a year, then NAV of A will become Rs. 11 and NAV of B will become Rs. 220. So, no difference in returns.
NFO's are not like IPO, in NFO the NAV is fixed at Rs. 10 per unit and is not affected due to the demand or other factors. While in IPO the listing price of the stock depends on the demand and market’s expectation of the company.
iv. Risk of investing in these funds are high as we don’t know how money will be allocated. The fund manager cannot allocate the money before he collects the entire money. Moreover, the investor has
trust over existing fund manager he has given the required returns.