• Don’t invest in mutual fund NFOs just because they offer units at ₹10. 

   

• Study the mutual fund scheme’s investment objectives, investment strategy and risk levels and invest if it meets your financial goals. 

The AMC announces new mutual fund schemes in an NFO with important details like investment objectives,  investment strategy, asset allocation, benchmark, risk level, exit load etc. Standard NFOs remain open for a maximum of 15 days and units are usually offered at a face value of ₹10 per unit.  You can apply for the NFO during this period.

After the NFO closes for subscription investors receive units of the mutual fund scheme  within 5 business days. If your NFO application is wrong or incomplete it gets rejected and your money is refunded. The funds collected through the NFO are invested in stocks, bonds, commodities like gold and silver or foreign stocks depending on the funds investment mandate and asset allocation.

You can buy more units of the scheme or redeem units after it enters the ongoing offer period. It is a phase where open-ended mutual funds are continuously open for purchase and redemption at the daily net asset value (NAV). 

AMCs usually launch NFOs at ₹10 per unit. Investors may chase these NFOs as they are available at just ₹10 per unit. It looks like you are getting more units compared to an existing mutual fund scheme which has an NAV of ₹100 or ₹125.

A mutual fund's NAV shows the total market value of the mutual fund scheme’s underlying assets divided by the number of outstanding units. An NFO offering units at ₹10 only means the fund house divided the  money pooled in by the investors into units of ₹10 each. The stocks in its portfolio are not offered at a discount.

If you invest ₹10,000 in an NFO of an equity mutual fund scheme whose NAV is ₹10 per unit, you will get 1,000 units. But, if you invest ₹10,000 in an existing equity fund scheme whose NAV is ₹100 per unit, you will get 100 units.

If both these funds' portfolios grow at 15% in one year you will get ₹1,500 either way. It means NFO units are not cheaper than units of existing mutual fund schemes.

Do note that NFOs do not have any special tax treatment. The units of an NFO on redemption are taxed just like any other mutual fund scheme, depending on the type of fund and the holding period. The holding period of the scheme commences on the allotment date.

AMCs may charge an exit load of 1% of the redemption value if you redeem the NFO units before a specified holding period, most commonly within a year. 

• New Themes: NFOs may offer new investment themes, a new factor strategy or an index which has never been tracked. You could look at NFOs to cover the gaps in your portfolio. If an NFO offers a new investment theme which isn’t present in existing mutual fund schemes and you like this theme and it meets your financial goals, then you could invest in the NFO.

• Fresh deployment: An NFO fund manager builds the mutual fund scheme’s portfolio from scratch, by taking advantage of the current market valuations. However, many existing funds could have underperforming or legacy stocks in their portfolio which impacts their performance.

  Mutual fund NFOs have their share of disadvantages too.

• No track record: Freshly launched mutual fund schemes don’t have a track record. It means you won’t know the consistency of the fund or how it handled market crashes.

• Higher costs: Many new mutual fund schemes may have higher expense ratios than existing mutual fund schemes which can impact the schemes returns over time.  

• Mutual fund NFOs may offer unique investment themes. You could diversify your portfolio across these investment themes if they help you achieve your financial goals. 

• Mutual Fund NFOs build portfolios of the schemes from scratch. It means you cannot check the mutual fund scheme’s past returns, determine its consistency over time or gauge its performance during previous market crashes.