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Why it is better to avoid investing in NFO?

Mutual Fund

At the time of NFO launch, there is a lot of hush and buzz in the mutual fund market. The latest NFO and its investment strategy is discussed in the media to attract your attention. If the new fund offer is an open-ended fund, then you can invest in it after the NFO investment or subscription period ends. Whereas for the closed-ended fund, the investment period ends with the NFO subscription period. Before getting into the details of whether NFO investment is better or not, let’s discuss what actually NFO is.

What does NFO means?

When a new fund is launched by a fund house, for almost 10 to 15 days, the NFO or new fund offer is open for subscription. Within this NFO investment period, the fund house gathers money to buy stocks for the fund’s portfolio. You can buy NFO units for the closed-ended fund only during the NFO investment period. But for the open-ended fund, you can invest after the NFO subscription period is over.

NFO Investment- Pros & Cons

As said earlier, the new fund offer is launched in the market and has no track record. If you think of investing in the latest NFO, then the only trustable part is the performance history of the AMC. Moreover, the corpus of the NFO is very small. Thus the expense management fee for the new fund offer can be high. So, before going for NFO investment, it’s better to see it’s positives and negatives.

Here are some important points to consider before latest NFO investment-

No Performance History

The New Fund Offer has no track record of its performance. You don’t have any proven record that the investment strategy of the NFO yields expected return or not. In this situation, you become dependent on the performance of the fund house. But that’s not the best approach for your investment decision.

Instead investing in a fund that has a previous track record is a much more sensible thing to do. With full details on the risk of the fund, return history, you will not be in a position to gamble your investment. So, it’s best to invest in an existing fund rather than go for NFO investment.

Timing of Launch

To meet a particular investment theme or to complete the product basket, an AMC launches an NFO. When there is a growing demand for a particular theme. then an NFO is launched. But it does not mean that your NFO investment will yield the expected result. Going for any thematic funds will yield results based on the timings. So, the launch timing of NFO is very crucial and must not be the deciding factor for NFO investment.

High Manage Expenses

The amount that is required for managing the fund investment is called Expense Ratio. This fee of NO investment is a % of the fund’s portfolio that gets subtracted from the yield return. During the latest NFO investment period, you will have a minimum idea of the expense fee which gets disclosed later. With lower corpus size, the new fund offer needs a higher expense ratio. Gradually, the corpus increases and the management cost comes down. So, you must keep in mind the high-cost burden for the NFO investments.

Latest NFO investment is a gamble. To secure your investment, the best idea is to avoid NFO and go for the funds that have a proven track record. Give some time and study the performance of the NFO and then try to invest.

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