It's the IPO season. Many IPO's launched this year, have done really well. Investors who invested in the IPO's of Avenue Supermarts, Salasar Techno Engineering and CDSL have got bumper returns. For those who don't know, when a Company offers its shares to the public for the first time, it's called an IPO.
Now, mutual funds are launching New Fund Offers (NFOs). You and many investors are confused...You believe IPO's and NFO's are the same thing. You might believe that if you invest in the NFO of a mutual fund, you are buying cheap. NFO's of Axis Multicap Funds, IDBI Focused 30 equity fund, Indiabulls tax saving fund have been launched, recently. So what is the new fund offer of a mutual fund also called NFO?
Mutual funds might need money to invest in stocks and bonds. Mutual funds raise this money from you and other citizens through NFO's. Simply speaking....This is the first time subscription offer of a new mutual fund scheme. The minimum amount you would have to invest could be INR 5000 and NFO's state their investment objectives. The net asset value of the NFO would be Rs 10 per unit.
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Its popularly believed that investing in a mutual fund NFO is an easy way to become rich. Mutual funds heavily market NFO's and you and other investors could fall for these schemes. Mutual funds take SEBI's approval before launching NFO's. Today, many mutual funds are launching NFO's of equity open-ended mutual fund schemes. Should you invest?
Before investing in an NFO, check its theme. Check for a unique theme which is not present among existing schemes in the market. Make sure this theme would continue in the future. Also take a look at the Mutual Fund house, track record of the mutual fund manager vis-a-vis other schemes and the past record of the mutual fund sponsor.
Was the sponsor able to collect money/funds for previous NFO's?
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Always look at the investment style of the NFO, before making an investment. Invest in the NFO, only if the investment process is clearly outlined. If the scheme deviates from the stated investment style, you need to be careful. Take a look at this investment style for an equity fund. The mutual fund manager might follow the blended approach where he invests in a mix of growth and value stocks.
Growth stocks grow at a much faster rate than the average market rate. However, these stocks do not come cheap and the fund manager has to pay a higher amount for these growth stocks. Value stocks have prices lower than intrinsic values and have the potential to go up in the long run. A fund manager tries to unlock value. He picks value stocks at a low price and these stocks could go up in the future.
Make sure the mutual fund sticks to the investment style.
Mutual funds are heavily marketing NFO's and you need to be careful. Never invest in NFO's unless they offer something unique. It's better to invest your money in a scheme with a proven track record. Sure, there's no guarantee of a profit but, you have the comfort of a consistent performer which has done well across different market cycles. Be Wise, Get Rich.
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