Precautions to take before you invest in NFOs

New fund offerings are similar to IPO for equities. A new fund offer is either issued when the AMC wishes to raise money for the first-ever time or when a new fund category is there, and AMC doesn’t have exposure. NFOs pool funds from different investors and then invest in bonds or stocks based on the investment goal. Mutual funds are the most common NFOs marketed by investment companies. 

Understanding NFOs  

Just like IPOs raise funds from the public, asset management companies raise funds from the public through NFOs. NFOs are launched and kept for a small amount of limited time. During this time, investors get opportunities to determine whether they wish to invest in it or not. They are accompanied by volatile marketing campaigns designed to attract investors to buy units in the funds. NFOs have the potential to deliver noteworthy gains after they are traded publicly. 

Pros and Cons of NFOs 

Investing in NFOs may seem to be an exciting method to diversify a portfolio. But, there are a few concerns that you should know before investing. For instance, some companies introduce new funds when the whole market is rich. In a rich market, investors are ready to try their hands on a new sector or industry of the economy. But it does not mean that since s new industry or technology is booming, it will stay famous in the future. Moreover, NFOs come with higher expense ratios than usual. 

Another risk associated with NFO investments is that the funds do not have a record of failure or success. A few bullish investors take this as a chance to earn large profits, while others think there is a high risk in investing in them as their performance cannot be tracked. 

Pros

The capability to diversify your portfolio

Access to developing sectors of the economy 

Cons

Developing industry or technology fund tracks can be overvalued

Larger expense ratio 

Precautions to take before you invest in an NFO 

• Check the investment goal of the NFO mutual fund scheme and carefully check the Scheme’s Information Document.
• Go through the earlier track record of fund managers and fund houses before you invest in the latest NFO in mutual funds. Fund managers who have a strong performance previously can manage new schemes efficiently.
• Ensure to check the theme of the NFO investment before investing. Invest in an NFO if an exclusive proposition is offered for the long term.
• Invest in an NFO after considering the scheme’s associated costs.

A new fund offer is an opportunity to include it in your investment portfolio. From an investment viewpoint, it certainly is a good idea to invest in an NFO that offers an exclusive strategy unavailable in the whole industry. The mutual funds should have the potential to offer returns in line with your investment horizon and risk profile.