New Fund Offers (NFO) - Stay away from them

Indian stock markets were at their peak in 2007. Investors witnessed a galore of New Fund ffers at that point of time. As many as 20 new fund offers were made during that period. But when the stock markets crashed in January 2008, all the funds that were introduced before Jan 2008 were badly hit by the crash. It was actually a lesson learnt for most of the investors.


In general, investors get lured by the NFOs or the new fund offers due to the exaggerated promotion by the companies. They tend to see the offers in a way that they can get the units at a mere 10Rs/unit. But they do not think whether this NAV at 10Rs per unit will sustain in future!

You get returns only when the fund performs well. So trust the funds that have proved their mettle over the past few years. You get returns when the funds performs well and increases its net asset value, irrespective of whether the unit is available for Rs. 10 or Rs. 100.What investors should do is to evaluate the funds over a period of time (time frame of 3 years to 5 years). Examine their returns, their stability of giving good returns and also the performance during the bear market which is actually very important.

For ex: Consider you have bought 100 units at Rs. 10 in a NFO. Simaltaneously, you have bought 10 units at Rs. 100 each from a reputed Mutual Fund which proved its performance over years. In a bull market the second fund performs very well and its NAV is increased to 110. So your investment is now worth 110*10units which is 1100Rs.

In the first case, where in we are not sure of the performance of the fund, the fund may perform good or bad. Say it has done well and its NAV is now 10.5, so your investment is now 10.5*100 which is 1050Rs. which is lower.

But the actual difference comes in when the market is in a bear phase. The reputed fund in second case performs well or atleast doesn't perform badly. But the NFO might lose value and your returns might shrink and can even give you a loss.

When you subscribe for a New Fund Offer, you are neither assured of its performance nor the returns. So always better avoid the New Fund Offers, unless the NFO has a very convincing idea which is unique and different from the available funds.