Avoiding New Fund Offerings (NFOs) might not be the optimal choice
In the world of mutual funds, the choice between established funds and New Fund Offers (NFOs) can be a tricky one. Here's why many investors tend to lean towards the former.
Firstly, a proven track record is a crucial factor when choosing a fund. Established funds have a history of performance that can be evaluated on parameters like past performance, risk, and other factors. On the other hand, NFOs are new funds with no past performance history, making it difficult to assess their potential returns or risks.
Secondly, NFOs often come with higher costs and fees. These costs can include setup costs, marketing expenses, and regulatory allowances for higher fees in new funds. These fees can significantly reduce net returns, especially when the fund is small.
Thirdly, market timing risks are a concern with NFOs. Fund houses often launch NFOs during bullish market conditions when valuations are high, potentially leading investors to buy at expensive levels and face downside risk if markets correct.
Fourthly, liquidity can be an issue with NFOs. Units of NFOs may have limited liquidity, and since units are allotted only after the NFO period closes, investors cannot trade during the subscription window, which can affect flexibility.
Lastly, there's uncertainty and management control. Returns are not guaranteed and depend on the fund manager’s decisions. Investors have no control over investment choices and must trust the fund manager’s expertise, which can sometimes result in misuse or poor management.
However, NFOs can be considered if they offer unique investment themes or diversification unavailable elsewhere, provided the investor understands and accepts the associated risks. For instance, the Bharat CPSE ETF NFO offered a 5% discount, making it worthwhile to consider.
Investing in a new fund just because it has been launched does not necessarily mean it's the right time to invest in that fund category, especially if triggered by market demand. Picking a fund with a track record makes more sense when a fund is launched in a category where funds already exist.
In the case of close-ended funds, it's essential to be aware of the investing strategy the fund will follow as you will be committing for a specified duration. Investing in a close-ended fund that fills a gap in your portfolio can be considered, but one should be observant of the fund's strategy before investing.
In summary, the lack of proven performance, higher initial fees, riskier timing, and lack of liquidity are major reasons why investors often avoid NFOs, preferring established funds with verified track records. However, NFOs can be considered if they offer unique investment themes or diversification unavailable elsewhere, provided the investor understands and accepts the associated risks.
Experienced investors often prioritize established funds over NFOs due to the former's historical performance data, which allows for a better evaluation of risk and returns. Conversely, the absence of past performance data for NFOs makes it challenging to predict potential returns and risks.
Additionally, many investors find NFOs less attractive due to their generally higher upfront costs and fees, which can diminish net returns, especially when the fund is small.
%20might%20not%20be%20the%20optimal%20choice){kind=link}