Are you Confused with NFOs?

Disclaimer: Not an Investment Advice

With so many NFOs launched already this year (already 50+) and AMCs are filing for many more, I thought this would be the right time to share some related points that might help many of my friends who are not much into this field and have limited or marketed knowledge about NFOs. Below are few things that I think you should keep in mind before investing in NFOs

1. First things First, NFOs are not IPOs. Many people confuse NFOs with IPOs. Through IPOs (Initial Public Offerings) Corporations offer shares to the public through issuance of new stocks (in the stocks market). Investors predominantly goes for investing in IPOs for something called the listing gains.

Let’s take an example to understand listing gains.

Before new stocks are listed in the exchange, they are offered to the public at an issue price through an IPO. Say, the issue price in our example is Rupees 150 per share. And you as an investor have to book the shares at this price. This stock is listed in the market after a period of say 1 week to 2 weeks. The day it gets listed in the exchange (market) the prices per share may be higher or lower than the issue price at which you have booked, depending upon the demand of the shares in the market. In our example, we consider a huge demand for the shares and thus on the listing day the shares are listed in the exchange at say Rupees 200 per share. In such a case you can sell your shares at Rupees 200 per share getting a LISTING GAIN of Rupees 50 (200-150) per share.

But an NFO (new fund offering) is launched by an Asset management company (mutual fund co.) to offer units to the investor for the new funds they are launching. And in such cases of NFOs there is nothing called listing gains.

2. NFOs are hugely marketed by the companies, banks and many advisors pitching that they are available at a cheaper price and thereby misleading the investors. The cheaper price here does not matter at all, because, your gains from any mutual fund will purely depend on the performance of the fund and the capital you have invested, irrespective of the price of the unit at which you are investing.

3. It is always better to invest in a mutual fund that has been in the market for some time so that you can study how it has been performing, rather than investing into NFOs straight away.

4. All mutual funds are categorised as per various market caps, the instruments they are investing in, there investment style and so many things. So, If you already have an alternative for the NFO as an existing fund in an existing categories, do you really think it is worth investing in an NFO?

You decide.

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