NFOs: Marketing hype or investment opportunity? Consider NFOs only if they fill a gap in your portfolio

Unlike IPOs (where investors benefit from listing gains if shares are priced below their fair value), NFOs are not available at a “discount”. (AI image)

The flood of NFOs is not abating. Some 25 new funds were launched in August, and the rush has continued in September. Four NFOs are open right now, and seven more are scheduled to open in the next two weeks. If you are planning to invest in any of these new funds, here are a few things to keep in mind.Unlike IPOs (where investors benefit from listing gains if shares are priced below their fair value), NFOs are not available at a “discount”. In fact, the NFO price of Rs 10 is neither cheaper nor expensive than other funds. At the time of NFO, the fund does not hold any stocks and the Rs 10 you pay per unit gets invested in the stock market at the prevailing price level. So the Rs 10 price of the unit has no relevance.Also, unlike existing funds, NFOs do not have a track record. Existing funds already have years of performance data across market cycles. An NFO has none, so you are investing without history. The only thing one can go by is the credibility of the fund house and the fund manager who is in charge of the new fund.Before you invest in a new fund, assess whether it fits into your overall portfolio strategy. If the NFO is just another equity fund, investors are better off in existing well performing schemes with proven fund managers.Go for a new fund only if it offers a unique investment opportunity. Some NFOs are focused on new themes (like thematic, sectoral, passive or international funds). Others may offer diversification you don’t currently have (say a new smart beta index fund, or a niche sector theme that isn’t otherwise available). These may be worth considering if they fit into your investment strategy.Stick to your financial plan, and consider NFOs only if they fill a genuine gap in your portfolio. In many cases, it is better to allow the fund to build a 3-year track record before entering.Ongoing and new fund offers in the pipelineSome of these schemes are open and others will be launched in the next two weeks