NFO

What is NFO ?
Secondary market in equity is in the midst of a historic time period. It is creating new highs practically every other day. Investors are making huge profits. The mutual funds are also, accordingly, giving spectacular returns.




In such a scenario it is but natural for the euphoria to pass on to the primary market. While on one hand more and more companies are coming out with IPOs or additional offers, mutual funds too have not lagged behind in coming out with New Fund Offers, NFO, with increasing regularity. And predictably enough, these issues have generated huge interest amongst the investors and raised thousands of crore. In fact investors have redeemed from a well performing existing fund to invest an NFO with similar objectives.


Primary issues in an equity market are a different subject matter in itself.


However, as regards the NFOs from Mutual Funds, there is a need to critically examine the same. Mutual Fund NFOs are nothing but commencement of a new scheme. They should not be confused with equity IPO and hence one should not expect a huge listing gain akin to one.



Various factors need to be considered while making a decision to invest in an MF NFO:



Rs.10 or Rs.100 – NAV makes no difference

One of the major reasons for the success of mutual fund NFOs has been the continued ignorance of an average investor with regards to the NAV. They have all along assumed that if they are getting the units at par i.e. Rs.10, they are getting it cheap.



NAV merely represents the market value of the portfolio. It is the book value. Thus when one invests in a mutual fund one is buying the units at the book value – which is Rs.10 for a NFO and could be Rs.15 or Rs.20 or whatever for an existing scheme.

The NAV of an existing scheme is higher merely for the fact that its’ portfolio has appreciated since the time it built it’s portfolio. Going forward, the returns over a given period of time will be same from an existing portfolio (with a higher NAV) and an identical new portfolio (with Rs.10 NAV). The earlier appreciation of the old fund does not make it expensive vis-à-vis an NFO.