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  • Writer's pictureKranthi Pachipala, CFP®,CTEP®, CREP®

Why Investing in NFOs Might Not Be the Best Idea: Debunking Myths

Are you considering mutual fund investments? New Fund Offerings (NFOs) might catch your eye, but before you jump in, let's explore why investing in NFO might not be the best idea for your money. In this blog, we'll debunk common myths surrounding NFOs with real data, helping you make an informed decision about your investments.


Myth #1: NFOs are Just Like IPOs

Many believe NFOs are akin to IPOs, promising lucrative returns. While IPOs could offer some listing gain opportunities for investors, There is no such thing as listing gains in NFOs as there is no demand and supply scenario. In IPO, there are fixed number of shares are on block and once listed, these shares can be bought and sold by individuals in the open market place. Contrary to this, there is no limit on the number of units in NFO or any mutual fund for that matter. If someone places a huge order the same fund on the opening day, there is no upper circuit :)


Myth #2: NFOs Are a Bargain at Rs.10 NAV

The Rs.10 NAV of NFO units can seem attractive, and many investors fall into the trap that they are getting it so cheap. But it's essential to understand that, Rs 10 NAV is just a psychological figure. Even if the units are allotted at Rs 100 NAV, the return on the portfolio would not be different as the returns only depend the underlying portfolio performance.

Another important factor is that NFOs often enter the market at a time of high valuations, leading to inflated expectations among investors.

Example: During the bull market of 2017-2018, NFOs flooded the market, with many investors lured by the low NAV. However, subsequent market corrections resulted in below-average returns for these NFOs. This highlights the importance of timing in NFO investments.


Myth #3: NFOs Are Cost-Effective Investments

Contrary to popular belief, investing in NFOs may not always be cost-effective. According to SEBI data, the expenses associated with NFOs, including marketing and distribution costs, can significantly impact returns for investors.

An analysis of NFOs launched in the past decade revealed that while initial NAVs were low, the total expense ratios (TERs) were often higher than those of established funds. This discrepancy underscores the importance of considering the overall cost of investment when evaluating NFOs.


Myth #4: NFOs Can Generate Long-Term Wealth

Many investors view NFOs as vehicles for long-term wealth creation. However, historical performance data suggests otherwise. A study by Value Research Online found that the majority of NFOs underperformed benchmark indices over extended periods.

Example: NFOs launched during market peaks, often experienced significant value erosion during subsequent market downturns. This trend highlights the risks associated with investing in NFOs without considering market cycles. [Source: Value Research Online - link to study]


Conclusion: Making Informed Investment Decisions

While NFOs may seem enticing, it's crucial to approach them with caution and skepticism. By debunking common myths surrounding NFOs and analyzing historical performance data, investors can make more informed decisions about their investment strategies.

Instead of chasing the latest investment fad, consider allocating your funds to established mutual funds with proven track records. Remember, successful investing is not about timing the market but time in the market. By focusing on sound investment principles and diversification, you can build a robust portfolio that stands the test of time.

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