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Should I invest in NFOs and IPOs?

Here is Dhirendra Kumar's view on investing in NFOs and IPOs

Is there any advantage of investing in IPOs and NFOs over buying an already existing mutual fund or stock?
- Arun

It is better to avoid investing in mutual fund NFOs simply because when it comes to investing in a mutual fund, our selection is largely based on the fund's history but a new fund has no history. Hence, it does not make much sense to invest in an NFO. Let it come up, let other people invest in it and see how the fund is being managed.

On the other hand, investing in IPOs has both pros and cons. In an IPO, a company issues its shares for the first time. Now the issue here is that if it is a good company, many people will apply for the IPO. Hence, there will be a big element of lottery and only a few investors will be allotted the shares. Also for an individual investor, the maximum they can invest in an IPO is Rs 2 lakh. You can't invest substantially until you are an institutional investor. Many good IPOs are listed at a substantial premium to their issue price. But you have absolutely no control over the number of shares to be allotted. The fear of missing out should not be the primary driver for which you invest in an IPO. IPOs are mostly invested in with a very short-term view. People invest, get allotment, get the premium and get out of it. So, it may be interesting to invest in an IPO with a short-term view. But the real way of making money in stocks is to invest in a good company, buy it at an attractive price and hold it for several years till the money compounds. This may not be possible with an IPO.