NFO , New Fund Offer

Mutual Fund Company ( AMC ) comes out with a NFO whenever they want to lauch a new fund . For the AMC there could lot of different motives for doing so

1) They want to lauch a new type of fund, not already in their porfolio of funds , for example say a Pharma Fund
2) They just want to increase their asset under management , since Asset managers bonus is based on this.
3) the valuation of an AMC is higher , higher the assets under its management.

Investor in a NFO needs to be very cautious

1) When the AMC sells initial units at Rs.10 , there is no underlying assets that is worth Rs.10 , as only after money is collected from the Investor the manager has to buy the underlying assets , which may end up at a value below Rs.10 in a highly volatile market

2) The New Fund , has no past performance records . Though we keep hearing the disclaimer that "Past performance is no gaurantee , as to how the fund will perform in the future" , still it is wise and prudent to see fast record of a fund and its manager through different market cycles . But with an NFO , there is no previous history

So Investing in NFO is like betting your money on a novice , who may have the potential , but yet to prove himself .

So my advice , avoid NFOs , there are sufficient well managed fund of every hue in the market for you to risk your money on a newbie

Image : FreeDigitalPhotos.net,Photographer: Sujin Jetkasettakorn