InvestorQ : Why are mutual fund investors liking NFOs?
Anisha Awate made post

Why are mutual fund investors liking NFOs?

9 months ago
The bull market and the frenzy around IPOs have brought in a huge throng of novice investors into the market. Mutual funds, not to be the ones being left behind, have launched a record number of NFOs (New fund offer) in the period. At an NFO stage, a fund house hasn’t even built a portfolio of stocks or other instruments. At this point, a fund house simply collects the money. Many investors prefer an NFO over existing funds as a new fund is available at the price of Rs10, which is its net asset value (NAV). Investors often make the mistake of looking at an NFO like they'd look at an IPO. But the difference between the two is that the price of a stock is based on the supply and demand of it, whereas mutual fund units have an endless supply. The demand of a fund has no impact on its NAV. Units are created as and when required.

The other reason why people flock NFOs is that they are pushed by agents, distributors or relationship managers because they are on commission. Naïve investors who are not accustomed to mutual funds think that an NFO will offer them an attractive entry point, which is a fallacy. Moreover, investors should not invest in an NFO based on the assumption that a new fund will generate better returns. It is a misconception that NFOs create better value than existing funds. A lot of investors invest because of the net asset value price; however, it doesn’t mean that it will give you double-digit CAGR (compounded annual growth rate) returns.

Additionally, new funds tend to be more expensive than their peers. Launching a new fund incurs a lot of expenses. The fund house often invests heavily in promotion and marketing and these expenses are ultimately passed on to the end investor. Further, funds that have a smaller AUM (assets under management) can charge higher expenses, keeping in line with regulatory norms.