New Fund Offerings or NFOs are essentially a marketing gimmick by the industry to garner fresh fund inflows. The sales staff and distributors are heavily incentivised to push NFOs for high commissions.
1. The optical illusion of Rs 10 NAV
Often NFOs are pushed saying that the NAV is only Rs 10 and hence it is cheap. This is an optical illusion because the NAV is derived from underlying stocks whose price is not changing just because the NFO is being launched!
2. There is no ‘history’ to compare
The NFO is new and there is no historical data to compare how the fund has done. Its performance vs the benchmark and peers is not known.
3. Closed ended funds are a trap
Often NFOs are in the form of closed ended funds. This means your hard earned money is locked for 3 to 5 years. Of course the distributor makes a killing by collecting the entire commission in one shot.
Many bankers and wealth managers also love closed ended funds because their incentives are met and they know that they are not going to be around when the closed ended fund matures.
I have seen numerous HNI folios clutter with poor performing closed ended ‘Series’ fund pushed as an NFO. This is a big value destroyer.
Conclusion:
Stay away from NFOs and closed ended funds. Switch to direct plans. Import your portfolio on a direct mutual fund platform (click: jama.co.in/i ) and check if your portfolio has any of these traps in it.
The above 3 tips are mandatory for every investor. Make sure that everyone you know are well aware of it and don’t gift their hard earned money to the ‘industry’.
