MUTUAL FUNDS: Invest in NFO? 4 key factors to know
A New Fund Offer (NFO) document is issued by a management company when it offers investors a new mutual fund system. In fiscal year 2020-21, nearly 88 NFOs were launched by various fund houses, which is 75% higher than the average of annual launches for the past 10 years.
NFO documents are on average between 100 and 150 pages. Reading them in depth is a time consuming process. Let’s see how an NFO is different from the Initial Public Offer (IPO), what are the critical aspects to look for in such a document before investing in the NFO.
NFO vs IPO
Investors are often confused between NFO documents and the IPO prospectus. The IPO document is issued by a company to raise funds and it consists of information such as the purpose and use of funds, financial risk of investment, projected financial statements, key management employees, etc. . ) and Statement of Supplementary Information (SAI). The SID provides information such as the investment objective, asset allocation model, investment strategy, fund manager profile, benchmark, etc. SAI presents all statutory and other information relating to AMC.
Plan investment thesis
It is very important to read this part of the document to know the plan’s investment objectives. This information could be obtained from the SID, where the mutual fund indicates what it aims to achieve in terms of returns and how it plans to achieve them. Here they indicate how the regime plans to allocate its assets; like whether it is an equity-focused plan or invests primarily in debt and money market instruments or takes a hybrid approach.
Asset allocation strategy
Investors should pay attention to this section as the mutual fund shows its proposed asset allocation strategy among different asset classes such as stocks, debt, commodities, REITs etc. on various asset classes. Indeed, this part will help investors to assess whether their risk profile matches that of a mutual fund.
Rationale for security selection
This is another crucial part of the document. In this section, the mutual fund system sets out the rationale for security / stock selection. The program also discloses its approach to security selection; namely, top-down approach or bottom-up approach or fundamental or technical approach or a combination of all of them. In addition to the rationale, this part of the document shows the investment philosophy of the scheme. For example, a program could track value investing or growth investing or a combination of both. Thus, this section presents in detail the investment process and systems.
The track record and market reputation of the fund company are important factors to consider. This can be seen by checking how long the fund company has been around, how many mutual funds it currently offers and how well those systems are performing. An established fund house that has a better history is always more preferable. Likewise, it is prudent to check a fund manager’s background by checking the performance of plans currently managed or which have been managed by him in the past, or his professional experience in the mutual fund industry, etc. The fund manager is the person who actually manages the money invested in the plan.
To conclude, as an investor, one should read at least the tips above to better understand the mutual fund system and the fund house before investing in the new systems.
The writer is professor of finance and accounting, IIM Tiruchirappalli
NFO documents consist of an Information Schema Document (SID) and a Supplementary Information Statement (SAI)
SID provides information such as investment objective, asset allocation model, investment strategy, fund manager profile, benchmark, etc.
SAI presents all statutory and other information relating to the AMC