NFOs vs IPOs: Should you invest in mutual fund new launches or stick to proven winners?

In 2024, India’s IPO market was a goldmine, with many listings delivering 50-100% returns, fuelling investor frenzy. This has led some to mistakenly equate IPOs with Mutual Fund New Fund Offerings (NFOs), expecting similar windfalls. However, NFOs are not IPOs. While IPOs involve buying company shares with potential for quick gains, NFOs are new mutual fund schemes launched by asset management companies (AMCs) to pool money for diversified investments. Their returns depend on portfolio performance, not listing pops. With this distinction clear, let’s weigh the pros and cons of investing in NFOs.

Advantages of Investing in NFOs

• Innovative themes: NFOs often target emerging sectors like AI, green energy, or small-caps, offering early access to high-growth areas unavailable in existing funds. "NFOs often bring fresh ideas to the market — like infrastructure-focused funds or those targeting ESG or international exposure. If it gives you access to a theme missing in your current portfolio, it might be worth considering," said Sanjiv Bajaj, Jt. Chairman & MD at BajajCapital.

• Low NAV Appeal: Launched at ₹10, NFOs create a psychological sense of “buying low,” attracting new investors, though NAV doesn’t determine returns.

• Diversification: NFOs focusing on global equities or thematic investing (e.g., index funds) can diversify portfolios, reducing risk.

Disadvantages of Investing in NFOs

• No Track Record: NFOs lack historical data, making it hard to assess performance across market cycles, unlike established funds.

• Hype-Driven Risks: Many NFOs ride trending themes (e.g., Defence, Manufacturing in 2024), but if sentiment shifts, returns may disappoint.

• Higher Costs: Initial marketing and setup expenses can lead to higher expense ratios, eating into early returns.

• Overlap with Existing Funds: With over 2,000 schemes in India, many NFOs mimic existing funds, offering little unique value.

Should you invest?

NFOs aren’t the get-rich-quick schemes some mistake them for in this IPO-crazed era. “NFOs are long-term plays, best for those eyeing unique themes or diversification from trusted AMCs. But don’t let the ₹10 NAV or slick marketing cloud your judgment. Established funds with proven records often outshine untested NFOs. Before you invest, ask: Does this NFO offer something truly new? Does it fit my goals? A financial advisor can help cut through the hype,” said Atul Shinghal, Founder and CEO, Scripbox.

“In 2024’s whirlwind of wealth-chasing, NFOs are a tempting proposition—but tread carefully. Choose wisely, and your portfolio might thank you,” said Shinghal.

Unlike existing mutual funds, NFOs don’t have a track record, so there’s more uncertainty.  “Sometimes NFOs are launched more due to market hype than investor need. Always check if the theme truly adds value. Don’t chase an NFO just because it’s new. Look at the fund manager’s track record, understand the strategy, and ensure it fits your goals,” said Bajaj.