Three popular myths about NFO busted

Posted by Shaheen Shaikh on October 1st, 2022

NFOs or New Fund offerings of mutual funds are like IPO for equities. NFO is the term used when a fund house for the first-time issues units. Many investors prefer to buy NFO over mutual funds as it is available at Rs.10. While others prefer to invest in NFO considering that it is similar to the IPO of companies. But both the investors are doing wrong.

Though there is nothing wrong with investing in NFO mutual fund, you should know what it is before investing your money in it. There are many myths that investors should get over so that they can make rational choices about their investments. Here are some of the popular myths:

1. NFOs are like IPO of equities - There is a difference between NFO and IPO. In IPO, fresh funds are raised for the company. In NFO, there is no limit on the funds that can be raised. IPO offers a separate quota for retail investors and institutions. It comes with a discount for retail investors. While NFO offers no benefit to retail investors. Another difference is that IPO price is determined by the principle of demand and supply. In NFO, there is no role of demand as supply as there is always unlimited supply, and the cost of NFO is fixed at Rs.10 in all cases.
2. Buying NFO is cheaper than mutual funds - This is also untrue as the mutual fund, when it comes out with NFO, has to spend a lot on distribution, publicity, and marketing. The higher cost is due to advertising, printing pamphlets and forms, and roadshow. In addition, there is an added commission cost for brokers and distributors. So, when all these extra costs add up, the cost of NFO goes high.
3. Like IPOs, NFOs are also launched by companies. - NFOs are launched by AMCs and mutual fund houses. NFO is launched as a new idea in the market. When the market is at its peak, the NFOs are highly concentrated. IPOs, on the other hand, is for the expansion, repayment of debt, diversification, etc. Companies also do an offer-for-sale where promoters offload their stake via IPOs.
4. NFOs are attractive as they are available at Rs.10 - This is another myth. The net asset value indicates the unit value of the underlying portfolio of the fund. When the Nifty is at 30 times P/E, equity NFO comes out, and all existing funds are buying stocks on these valuations.

You will see the latest NFOs in a mutual fund when the market is trending, as that is the time when it is easier to sell an idea of NFO. Most of the NFOs are sectoral that align with the market. You may find Rs.10 NAV is very appealing, but you shouldn't get carried away. Investing in reputed mutual funds online is a much better choice.