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Here's why investing in mutual funds NFO is not always a good idea

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According to Arun Kumar, head of research at FundsIndia, a lot of NFOs are not new product innovations but mostly done by AMCs trying to fill categories where they don’t have funds.

Here's why investing in mutual funds NFO is not always a good idea

A new fund offer (NFO) is the first subscription offering for any new fund offered by any asset management company (AMC). Mutual funds are one of the most common new fund offerings marketed by an investment company.

Through these, investors can purchase units of a mutual fund at the subscription price.

While some may consider it a decent investment option, experts suggest investors hold back when it comes to NFOs.

According to Arun Kumar, head of research at FundsIndia, a lot of NFOs are not new product innovations but mostly done by AMCs trying to fill categories where they don’t have funds.

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"While psychologically new launches create excitement for investors, it is better to stick to established well-run funds with a proven track record, unless there is a genuine case for the new offering. Investors should generally stick to funds with at least a 5-year track record so that they can see how the fund has been managed across different market phases," he suggests.

Prateek Mehta, co-founder of Scripbox advises investors to park money in other options instead of NFOs to create and accumulate wealth.

"There is a myriad of options that represent the opportunity to create good market-linked returns. Investors have a range of options across the board on the equities and fixed income side. It is better to ask a wealth specialist to provide recommendations depending on age, stage of life, and the cycle of wealth. What is the need as an investor, is the right asset allocation depending on his/her ability to generate appropriate returns in the future," he opines.

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Most of the NFO’s do not fit into this framework.

However, Mehta says, that in case there’s a new theme that has hitherto not been present in the Indian market, then investors can consider it - only if that theme fits into the asset allocation strategy created for investors' context.

Other instances when investors can consider NFO (according to Kumar) are:

  • When the offering is unique and cannot be replicated by existing offerings.
  • When the fund manager has already demonstrated performance in other similar funds (either in the same fund house or a different one).
  • When the lower size becomes an advantage (say in the case of small-cap funds etc).

Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.

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