Key factors to know before investing in NFOs

Key factors to know before investing in NFOs

by 5paisa Research Team Last Updated: Dec 14, 2022 - 07:46 pm 41.5k Views
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In the year 2021, tons of new fund offers (NFO) were launched. However, most investors face issues evaluating them. Read on to find out how to evaluate NFOs.

The year 2021 was spectacular for equity markets where Nifty 50 gave around 23.8% returns whereas a much broader market Nifty 500 returned around 29.6%. Equity markets began to rally since the first leeway was given after the COVID induced lockdown. Having said that, this is the perfect time for a mutual fund company to launch new products.

In the year 2021, there were tons of new funds launched by the asset management company (AMC). Last year, almost 77 new mutual funds were introduced. This figure does not include exchange-traded funds (ETF) and fund of funds (FoF). New Fund Offers (NFO) are chiefly launched when the markets show good returns in the last six months to one year. AMCs hardly come with new launches in bear markets for obvious reasons that equity interest has diminished.

With so many new funds being launched, it becomes difficult for investors to understand in which fund they should put their money. Hence, we have listed key factors that you should know before buying investing in NFOs.

What’s the track record of the fund manager?

Unlike the Initial Public Offer (IPO), NFOs do not have any track record. However, the track record of the fund management team is available as they likely have managed different schemes. The track record of the fund manager gives the investors a rough idea about how they manage funds what kind of investment style they are specialised in.

Is it the same theme?

A lot of new funds launched do have funds from other AMCs with a similar theme. Say for instance, PGIM India Small-Cap Fund was launched in July 2021. However, almost 24 funds are having similar fund objectives. Moreover, there are almost 15 such funds that have a Net Asset Value (NAV) history of more than three years. Therefore, you need to find out what unique criteria this fund is offering when compared to others.

What is its asset allocation?

Mutual funds must show their asset allocation strategy in a Scheme Information Document (SID). Therefore, you need to check the fund’s proposed asset allocation strategy as to how it plans to divide the money among the various asset classes such as equity, debt, commodities, Real Estate Investment Trusts (REIT), etc.

What is its investment strategy? 

This is one of the most crucial parts that investors should not ignore. In the SID, funds also mention their investment strategy. Here they state how they would be selecting the stocks or securities. This would also reveal the investment style such as value, growth or blend adopted by the fund. Furthermore, they also disclose its approach towards stock selection. This means whether they use top-down approach or bottom-up approach, fundamental, technical approach or a combination of all to select stocks.

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