New Fund Offerings (NFOs) in the mutual fund sphere often raise eyebrows due to misconceptions that liken them to IPOs in the equity market. The fuzz is created when there is a new fund offer that often excites the investors. Not only retail investors but also business owners plan to invest business money in NFO. However, delving deeper into this topic and dispelling the myths surrounding NFOs is crucial for anyone considering investing idle cash. In this blog, we’ll debunk common myths surrounding NFOs to offer a more comprehensive and understandable perspective for business owners aiming to make informed investment choices.
Myth 1: Mutual fund NFOs are exactly like equity IPOs.
Contrary to popular belief, NFOs and IPOs have distinct differences. An IPO can either involve raising fresh funds for the company or selling existing shares (offer for sale). On the other hand, an NFO is primarily focused on raising fresh funds. Unlike IPOs, there are no limits to the amount of funds an NFO can raise, making the supply unlimited. IPOs offer special quotas and discounts for retail investors, a feature absent in NFOs. Additionally, the IPO price is determined by demand and supply forces, while the NFO price is fixed at Rs.10.
Myth 2: An NFO is better than a secondary market MF as it is available at NAV of Rs.10.
The Net Asset Value (NAV) of an NFO being Rs. 10 is not a decisive factor. What truly matters is the market level at which the investment is made, especially in the case of equity mutual funds. Buying an existing mutual fund in the secondary market at a higher NAV can be a good decision if market conditions are favourable, rendering the NAV irrelevant.
Myth 3: An NFO has a lower cost compared to buying existing mutual funds.
The truth is exactly the opposite. When a mutual funds scheme is new in the market, the fund house tends to spend more on its publicity and marketing, which increases the cost of advertising, publishing pamphlets, and marketing collaterals. Additionally, brokers may ask for higher commissions to distribute these mutual funds. These expenses are eventually debited to the NAV, causing the NFO to list at a discount to the par value NAV.
Myth 4: NFOs can create value for investors in the long run.
Investors often assume that NFOs can create long-term value. However, most NFOs tend to launch during market peaks, capitalising on the frenzy of the rally. They often focus on the hottest sectors, but history shows that many NFOs take a considerable time to reach par value or experience substantial value depletion.
Conclusion:
Investing idle cash in mutual fund NFOs is a decision that requires careful consideration and understanding of the prevailing myths. While NFOs may seem enticing, a more rational approach involves analysing market conditions, associated costs, and historical performance before making an informed investment choice. Business owners should explore options like sustained Systematic Investment Plans (SIPs) in established funds with a proven track record for potentially more prudent investment outcomes.
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Disclaimer: Mutual funds are subject to market risks. Read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance, and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
