New fund offers (NFOs): Risks, rewards, and how to evaluate them


Imagine scrolling through your investment account, looking for the next big opportunity to grow your wealth. Suddenly, you come across a new fund offer (NFO) from a well-known asset management company (AMC). The prospect of investing in a fresh scheme with the potential to reap lucrative returns is undeniably tempting, but before you invest, have you considered the risks and rewards associated with NFOs?

New fund offers allow asset management companies to launch a new mutual fund to the public. An NFO is similar to an Initial Public Offering (IPO) for stocks, except that they offer units of mutual funds. While NFO investments may seem like a golden opportunity, they also come with risks and rewards you must evaluate before deciding. Check it out in detail below.

New fund offers

Benefits of investing in a new fund offer in mutual fund

NFOs offer new fund management strategies to help you capitalize on current market trends or fast-growing sectors. If the theme or strategy works, you can benefit from it, and your overall mutual fund investment returns can be higher.

Also, NFOs offer lower prices than existing mutual funds because they are marketed at face value, which can be Rs.10 per unit during the launch phase.

Often, NFOs are launched to tap into specific sectors or themes, allowing investors to diversify their portfolios. This diversification can further help spread the risk and yield high long-term returns.

Risks with NFO investments

Investing in NFOs is riskier than investing in established mutual funds as there is limited data on the scheme’s performance. NFOs invest in new markets, sectors, or strategies and have no track record, making it difficult to evaluate the risk. Therefore, you should be prepared to accept this risk in exchange for the potential of higher yields.

A new fund offer comes with a limited period during which they are open for subscriptions. So, investors often rush to invest, fearing missing out on a potentially lucrative opportunity. Thus, there may be a herd mentality supporting NFOs, which may not always be wise.

So, how do you evaluate an NFO before investing?

1. Evaluate the fund house

Check the performance track record of the fund house. Look at their past investments and how they performed, and mitigate potential risks. A good reputation and a strong management team can give you some insight into how effectively the NFO will be managed.

2. Read the offer-related documents carefully

Go through NFO documents like the scheme information document (SID)and statement of additional information (SAI) before investing. They provide insights into the investment philosophy, fund manager’s experience, investment objective, risk factors involved, and other relevant details.

3. Check the fund manager credentials

Research the experience and track record of the fund manager before investing. A fund manager who has consistently generated above-average returns is more likely to deliver strong returns in the future. Also, evaluate their investment philosophy and style to understand how they align with your goals.

After evaluating these factors, you can invest in NFO like any mutual fund online through the AMC website or investment apps.

Point to note

Once you invest in an NFO, monitoring the fund’s growth and performance is important. This can help you identify potential opportunities for growth or risks that may require strategic adjustments. This can help you identify potential opportunities for growth or risks that may require strategic adjustments. Stay updated on any changes to the fund’s investment strategy, management team, exit load or expense ratios, and other key metrics that may influence the fund’s performance.

Carol P. Middleton
Student. Alcohol ninja. Entrepreneur. Professional travel enthusiast. Zombie fan. Practiced in the art of donating rocking horses for the underprivileged. Crossed the country researching hula hoops in Deltona, FL. Won several awards for supervising the production of etch-a-sketches in Nigeria. Uniquely-equipped for investing in bathtub gin in the financial sector. Spent a year building g.i. joes worldwide. Earned praise for deploying childrens books in Africa.