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What's Wrong with NFOs?

You usually don't recommend NFOs. What is wrong with them, if one invests in them at the face value and with a long term view? After all funds that you recommend were also new some years back.
-Rashid Shaikh

I have observed that you usually do recommend that investors should not invest in NFOs. What is wrong with it, if one invests in them at the face value and with a long term view? After all funds that you recommend were also new some years back..
-Rashid Shaikh

Firstly, please note that buying the units at the face value is not an advantage that you get by investing in a new fund. It makes no difference whether the NAV of a fund is high or low. For a detailed discussion on this, you can read our article here.

Generally, new funds are not recommended. However, it is not to say that these funds are bad, but what we mean to say is that one should wait for these funds to prove their worth over a period of time. The funds that are quite young currently may top the recommended funds' lists some time in future, if they perform well. Same has been the case with funds that are currently investment worthy. It is only by consistently performing well, in line with their objective that these funds have earned the reputation of being among the better ones in their respective categories.

Apart from that, new fund offers end up being more expensive. They may not charge any entry load but they charge initial issue expenses which can be up to six per cent of the amount that they collect during the new fund offer period. But investors do not come to know about it as it is amortised over a period of five years, rather than being charged up-front.

Moreover, nothing is known about the new funds, and they only have promises to back their claims. One might argue that past performance does not guarantee future performance, and therefore, nothing can be said with certainty even for the well established funds. This is true. But the fact is that this uncertainty is at its height in case of new funds. For an established fund, at least you know where it invests, and that the fund manager has shown the ability to manage the fund well in turbulent times.

Investing in a mutual fund involves making a choice from the various options available. And in the absence of any distinct advantage that a new fund can provide, a wise decision will be to choose an established fund about which you know at least something.



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