Why Not to Invest in an NFO

Instead of an NFO, choose to invest in equity funds that have a long history and proven track record

There's a reason why no matter what our age, we're always advised to listen to our elders. Often, we seek out their advice ourselves, for the every same reason - experience. There is no denying that experience counts. The more of the world you've seen, the more you've gone through, the better decisions you can take. This holds true for life, as well as for mutual fund investments. This is the reason why we always advice investors to pick funds that have a long history and proven track record. When the choice is between a new fund and an old fund, it's better to opt for experience.

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. NFOs are marketing devices; they're used by AMCs to push their assets under management. In previous years, AMCs used to come out with new funds that were identical to the funds that they already had. For what? Just to create a buzz and excitement for something new and attract new investors. Thankfully, SEBI has put a stop to this. It doesn't approve new fund offers if they're identical to the funds that AMC already has.

But yet, AMCs tend to devise newer funds and come out with something new every now and then. However, that doesn't mean you should invest in them. Take the example of the recent spate in new closed-end funds. 33 new closed-end funds have been launched in the past year or so. These funds come with an interesting story, which lures investors to them. But the problem with closed-end funds is they accept investments only in lump sum, you can't start SIPs in them. Even when you want to redeem your investments, you can't do so without suffering some kind of a loss. However, they're launched because they make better business sense to the AMCs, as compared to open-end funds. And of course, a new fund offer of a closed-end fund makes even less sense for the investor.

For most equity fund investor, a plain vanilla diversified fund is more than ideal. And that too one that has a proven track record. A fund that has been through various market cycles would be best equipped to take advantage of any bull run or protect your investments during a bull phase. In short, experience trumps everything else. Let the newbies earn their stripes, you have enough experienced funds to choose from.