Top 5 Essential Tips for Investing in a New Fund Offer (NFO)
A newly formed AMC launches a New Fund Offer. Here, investors can invest in a new fund at a pre-specified price. An NFO is different from an IPO because there is no overnight gain that one may expect and, in most cases, an NFO is an instrument that requires long-term investment. There are no historical data available for new funds; hence, the study of an NFO is quite tough. Here are five key tips that you must consider before investing in an NFO:
1. Assessment of the Fund House: One needs to check their history and how long they have been around, which is usually a sine quo non for an AMC. A good fund house is one that boasts a rather consistent performance for many years, thereby giving more stability in investments.
2. Understanding the investment strategy: Understanding whether the strategy of the fund is innovative and sustainable or merely a response to the trends in the present market. Ensure that the NFO strategy is innovative rather than seeking a response to the continuing market trends. Consider how the fund will outperform in comparison with its benchmark as well as whether its strategy is aligned along long-term goals.
3. Experience and Track Record of the Research Fund Manager: Understand his track record and performance history. He should have a good track record for particularly managing similar strategies which, in turn, shapes the success story of the fund. The more proficient and professional, the more he would be able to cope with all the newness associated with investment strategy complexities.
4. Cost Structure Analysis: Assess the long-term cost ratio and any other charges that are embedded in the NFO, beyond the offer price. Compare the costs of such mutual funds vis-à-vis those of the existing funds to determine their incremental effect on your returns over time. A low cost ratio provides a boost to overall profitability.
5. Consider Market Timing: Understand the current market conditions, the economic trend, and the regulatory change going to hit the fund. Avoid launch NFOs during periods of hype as market timing is said to significantly influence the success of an investment strategy.
Lastly, NFOs provide new investment opportunities, and at the same time, they pose risks as there are no previous performance histories attached. Investments in NFOs should be through complete due diligence-a proper analysis of the fund house, strategy, manager, costs, and market conditions-before finally committing to it. Advisory from a financial consultant can also be taken beforehand.
