Should you invest in NFOs?
New Fund Offers (NFOs) are back in the spotlight, with mutual fund industry seeing a pickup in launches over the last few months, with hybrid, index and thematic funds dominating the list.
While they present a wider choice, should you invest in an NFO just because it’s new?
“NFO activity right now is clearly tilted toward hybrid and index funds followed by thematic funds. These are the flavours of the season,” said Anup Bhaiya, founder, Money Honey Financial Services.
Fund houses are trying to capture investor appetite through balanced hybrid mandates, low-cost index strategies and niche themes that promise focused exposure, he said.
According to Association of Mutual Fund of India (AMFI) data, 18 schemes were launched in October, all open-ended and across categories, raising Rs 6,062 crore.
In September, nine schemes raised Rs 1,959 crore.
For investors, however, the appeal of NFOs often goes beyond what is being launched. There is a psychological pull with the idea of getting in early at the initial offer price of Rs 10 but the price holds no intrinsic advantage.
Once an NFO closes, it behaves exactly like any other mutual fund, with NAV reflecting its actual performance. What matters is the investment strategy, the competence of the fund house and how the fund fits into your portfolio.
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Money Honey Financial Services data shows 13 NFOs are currently open or closed recently, signalling renewed focus on new fund offerings.
Most recent NFOs are open-ended, allowing investors flexibility once the fund becomes active. As the mutual fund industry competes for investor attention, the range of products covers everything — from equity-heavy hybrids to sector-linked thematic funds and low-cost index trackers.
Hybrid funds tend to find favour because they strike a balance between equity’s growth potential and debt’s stability. Index funds, on the other hand, appeal to investors seeking passive diversification at a low cost.
Thematic funds round up the list by offering exposure to focused ideas such as defence, green energy or banking, though they carry concentrated risk that may not be suitable for all investors. Thematic funds can be explored on a limited basis with an allocation of 5-10 percent for those who can afford to take on more risk. Investors mustn’t chase short-term trends; they should invest by aligning their financial goals, investment time horizon, and risk appetite.
According to AMFI data for the September quarter, hybrid schemes mobilised around Rs 1.44 lakh crore from 173 schemes. Index funds Rs 25,979 crore from 344 schemes and thematic funds garnred Rs 9,555 crore from 10 schemes. Large-cap funds mobilised Rs 16,555 crore from 33 schemes and flexi-cap funds Rs 34,397 crore from 41 schemes.
In the past year, thematic funds like defence and commodities have given returns of 25 percent and 15 percent, respectively, while hybrid balanced funds have returned around 5-7 percent. Large-cap funds have delivered a return of around 10-12 percent over the same period.
Despite the growing number of launches, experts caution investors not to get swept up by the marketing buzz. The biggest limitation of an NFO is the absence of a performance track record. Without historical data, investors must rely solely on the fund house’s reputation and the clarity of the investment mandate. This makes NFOs less ideal for beginners and more appropriate for seasoned investors who know exactly what gap they are trying to fill in their portfolio.
“NFOs may not cater well to new beginners, but they work for those looking to expand their portfolio. The investor needs to identify what strategy is missing, and allocate accordingly,” Bhaiya said.
Due diligence is essential and involves evaluating the fund house, understanding whether the theme or strategy truly aligns with your financial goals and resisting the temptation to invest simply because a fund is new. In a market flooded with well-established schemes boasting long performance histories, an NFO must clearly demonstrate its value to earn a place in your portfolio.