NFOs (New fund offers) - A Risky Bet

Beware NFO Lovers!!

Most of the people in India are NFO lovers. Yes, I call them NFO lovers because they simply can't resist their temptation to invest in NFOs (New fund offers) by mutual funds. I have seen people who have invested in dozens of NFOs available in the market.

Here are the Top 2 reasons why people invest in NFOs. 

• This is because people think that NFOs are cheap because they have NAV of Rs.10 per unit.
• It's the normal human psychology that it loves to try something new and this psychology also reflects while investing.

Are NFOs really cheap?

Nope. Even though the NFOs have Rs.10 per unit NAV price, the underlying market is same stretched or contracted. Second thing is that, Unit price (NAV) does not have to do anything with MF returns.

Suppose if Fund A has NAV of Rs.10 and Fund B has NAV of Rs.1000 having identical portfolios and after one year suppose both the funds will generate 10% return, the NAV of fund A will be Rs.11 per unit and fund B will be Rs.1100 per unit.

NFOs don’t have any past proven record of good performance and that's why they should be avoided. A smart investor is one who invests in mutual funds having past proven record of more than 5 years of good performance.