Should I Invest In A New NFO?


It’s important to understand that a New Fund Offer is not like an IP in case of stocks. In case of an IPO, a company going to the market for the first time before it gets listed on the stock market for everyday trade. In case of an IPO, it’s like you buy a fish when it very small, wait until it becomes huge, and sell it at that point. The entire buying decision is based on the growth prospects of the stock. However, in case of a new NFO, you are initially giving money to the mutual fund to create a portfolio. The mutual fund manager, based upon the investment objective of the fund creates an initial portfolio.

This portfolio, which is a collection of stocks, is never constant. It keeps changing based on market conditions and what the MF manager senses about the market. The performance of the fund is based entirely on the MF manager’s ability to run the fund, the process that is laid out to execute the functioning on the entire fund, and the investment objective of the fund, not the NAV.

The precise reason for investors looking for an upcoming NFO is that they just feel that they are buying something cheap. However, the gains you make in NFO are entirely dependent on the difference between the NAV at the investment and at the time of redemption. Let’s assume there are two funds – Fund A and Fund B, and that you are investing Rs.1000 in each of these funds. In Fund A, you are investing in the NFO, but in Fund B, it is an open-ended fund in which you can invest any time. When you invested in Fund B, let’s assume your investment NAV was Rs.50. In the case of Fund A, your NFO NAV or your investment NAV was Rs.10. Based on the NAV and your investment amount that is Rs.1000, 100 units of Fund A were allocated to you along with 20 units of Fund B.

Let’s say the portfolio of both these funds was completely identical. Thus, the gains you made on both these funds were also identical. After some time, let’s assume you redeemed your investments from both these funds. The redemption NAV let’s say in case of Fund A was Rs.11 and that for Fund B was Rs.55. Thus, the number of units multiplied by your redemption NAV, your redemption amount in both the cases was Rs.1100. Hence, your returns would be calculated as the difference between your investment and redemption NAV divided by your investment NAV. In both cases, the returns were 10% as the portfolio was completely identical. Thus, your gains are not based upon your investment NAV. They are based on the difference between investment and redemption NAV. Hence, it hardly matters if you invest in Fund A or Fund B.

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