How to analyse New Fund Offer Schemes?

25 June 2021

ARTI ARORA CFP ^CM | HEAD FINANCIAL PLANNER

Mutual funds or Asset management companies (AMC) to be more precise keep coming up with new fund offers (NFO's) at different times. Typically speaking, a new fund offer is a first time subscription or offer for a new fund scheme that has been launched by a fund house.

An AMC could launch these NFOs either to cater to a specific or unique investment scheme / idea that they may have or to add to its offerings a fund idea not covered under their current schemes.

The question is how does one decide if one should or should not invest in a particular NFO?

There are some standard points that one must consider before investing in a NFO and these are as illustrated below:

1. Fund theme – The fund theme / investment philosophy behind a NFO must be carefully studied and evaluated before investment. How novel is the fund theme is a question that must be introspected very closely so that one does not get swayed by fancy marketing material and advertising that the fund house may resort to for obvious reasons.


2. Investor Portfolio – One must evaluate their own investment portfolio too before taking the investment decision. Does the NFO theme fit in one's portfolio or does one already have a similar fund investment already? It also needs to be seen if the fund on offer fits in one’s risk profile or not. If you are an aggressive investor, an index fund NFO may not fit in for you and likewise if you are conservative in your investment approach, a theme based or sectoral NFO may be a misfit.


3. Fund Manager track record – The fund manager managing the NFO also has an important role to play in the whole decision making process of whether or not to invest in a particular NFO. Where the fund theme is not new but the fund manager has an excellent track record, one can still consider parking a part of their portfolio in such a fund offer. Of course, fitment of the NFO to an investor's overall portfolio is a key point here.


4. Expense ratio – The fund expense ratio is another important factor to be taken into account when investing in a NFO. While it may seem a small amount but it does have a bearing on the final returns that the fund yields. If a particular NFO does not acquire required funds, it may happen that the initial charges of marketing and other distribution costs get spread over a smaller base of investors taking the overall expense ratio higher. Such risks are generally more common in case of smaller AMCs. You can browse through the previous fact sheets of the fund house and expense ratio to get a better idea.


5. NFOs sold on 'being cheap' pitch – The net asset value (NAV) of NFOs is priced at Rs.10 per unit. While this pricing may tempt investors, it should never be a standalone criterion to invest in any fund. A wrong buy may cost you heavily.

Last but not the least, it happens very often that when markets are going up or are on a bull run kind of stride, one tends to invest just anywhere and everywhere. Beware of such investment practices as they may only mar your overall portfolio returns rather than adding to it. The check list for a NFO remains the same as for any other investment product or plan already there except that for a NFO, the past track record does not exist and gets established only over time.