💸 NFOs: IPOs of Mutual Funds
While IPOs are rocking the stock markets, NFOs are rocking the Mutual Fund Industry.
Stock Market is where the real action is. The thrills of ups and downs; the possibility of becoming an overnight millionaire. Sky is really the limit.
Yet, the market is not everyone’s cup of tea. It’s like toxic love: Testing, nerve-wracking and all-consuming. If you have a full-time job, a low risk appetite, or both, dabbling with markets might not be a great option.
But if not stock markets, how do you even make money work to make more money for you?
An extremely popular alternative is Mutual Funds: you let someone else invest on your behalf, while you enjoy the returns.
Well, it sounds easy. But even mutual funds cannot be seen from the lens of black and white. You don’t just go and buy a mutual fund. There are a lot of varieties out there. And lately, New Fund Offers (NFOs) are creating a buzz.
Does it make sense to join this trend? Let's figure out.
So, what are New Fund Offers?
It’s not just IPOs that’s taking the town by storm. The frenzy of new listings is creating quite a stir in the mutual fund industry too. There have been about 100 New Fund Offerings in 2021 so far. And they have collected over Rs.76,000 crores!
You see, mutual fund companies have a wide range of products or funds. Each fund is based on a particular theme, such as liquid fund, retirement fund, etc. The fund managers make investments based on these themes. But why do they have different themes in the first place?
For the same reason ice-cream vendors have different flavours of ice-cream.
If the companies keep adding more and more new funds to their portfolio, they will be able to attract more and more investors. You might be interested in an ultra-short duration investment, while your friend might be interested in a medium duration investment. How do they attract you both?
By having different funds that focus on both the agendas. But that’s not the only reason.
Mutual fund companies are not into charity. When they maintain funds for you and give you returns for your investments, they charge for these services. This gets captured by the expense ratio.
But SEBI has put ceilings on the amount companies can charge as expense ratio, which declines as the size of Asset Under Management increases. It makes sense too.
Fixed costs don't increase in proportion to the amount of assets managed. They don’t have to incur significant additional charges to maintain them. If their expenses aren’t going up, why charge the investors any extra?
Sounds great for the investor. But this isn’t very beneficial for the mutual fund companies.
So they come up with new fund offerings (NFOs). Package them to make them look more lucrative to the naive investors. And Voila. They can now charge higher expense ratios in the NFOs.
Now the real question is, should you put your money in NFOs?
Beware of NFOs
An informed investor usually checks things such as what is the past record of the fund, how long has the fund been around for, what is the expense ratio like. But NFOs often don’t tick these boxes. So the prime target for them is a novice investor. And what better time for NFOs to find these gullible investors than a bull market!
Yes. As more and more investors enter the market during a bull run, it presents the perfect opportunity for mutual fund companies to come up with more and more NFOs. It’s difficult to not be tempted by the “Mutual Fund Sahi hai” recommendations.
And so, we have been seeing a boom in NFOs off-late. This has happened in the past too.
As per an article in Financial Express, around 50% of NFO investors suffered losses during the 2011 crisis. Why so?
In a boom, NFOs also get to show a pristine track record and target more and more investors.
But look at it from this angle: when investments are being made at all-time highs, will the performance sustain when the market falls in the future?
Yet, there are hopes that this time could be different. You see, this time NFOs are based around newer asset classes such as Blockchain, EVs, International stock markets. Maybe history won’t repeat itself?
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Amazing 😎
Knowledge in nut shell 📜
As usual crisp and clear
Most MF has NAV more than 10 in long-run and giving positive return to investor.... So be ready to invest more and keep averaging.... Always make profit and never make a loss.... Keep walking... BOOK PROFIT AT PROPER TIME...