Why you should avoid NFOs

There is no substitute for real-world experience. It informs your decisions and helps you avoid mistakes during difficult phases. While it holds true for the subject of life, it also applies to mutual funds. That's why, it always makes sense to choose an old fund with a proven track record over a new fund that is still finding its footing. After all, experience counts.

However, the popularity of NFOs can tempt investors to bet their money on one. And when they rush into investing in an NFO, they often assume that it is similar to an IPO. But there is a stark difference between the two. The price of a stock is based on its supply and demand, whereas mutual fund units have an endless supply. So, the NAV doesn't go up due to rising demand for a mutual fund. Units are created as and when required.

Simply put, NFOs are marketing devices that are used by AMCs to drive up their assets under management. Earlier, AMCs used to come out with new funds that were identical to existing fund offerings. For what? Just to manufacture a hype for something new and attract new investors. Thankfully, SEBI has put an end to this. The regulatory body doesn't approve new fund offers if they're identical to funds the AMC has already released in the market.

Yet, AMCs tend to devise newer funds and come out with something fresh every now and then. However, that doesn't mean you should invest in them. For most equity fund investors, a plain vanilla diversified fund is more than ideal. And choose one that has a proven track record.

A fund that has been through various market cycles and is supervised by an experienced fund manager who has been at the helm for quite some time would be your best bet. They would be able to take advantage of any bull run or protect your investments during a bearish phase. In short, experience is irreplaceable. Let the newbies earn their stripes, you have an array of experienced funds to choose from.

Also read: Sectoral & thematic funds are making everyone good money. Time to bite?