Thread by @ZerodhaVarsity

In 2021, there were 60 new mutual fund schemes (NFO) and they collected funds in excess of Rs.34000+ Cr and there are more NFOs coming up.
But does it make sense to invest in NFOs?

Here’s a thread🧵👇
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When an AMC decides to launch a new scheme, they do so by launching a New Fund Offer (NFO). The investor's money is collected during the offer period and invested in underlying securities once the offer closes. The AMC issues units to the investors after the NFO. 2/11

NFOs are compared to IPOs and painted as a once in a lifetime investment opportunity. In an IPO, allotment is not guaranteed, as it depends on the subscription rate. It is not the case with NFOs, as AMC can create units proportional to demand. 3/11

The sales pitch is to sell NFOs as being cheap at just Rs. 10 and that they can lead to wealth creation. The NAV of the NFO is just a reference price set by the AMC and doesn’t mean it's cheap. The NAV for similar existing schemes will also appreciate in the same way. 4/11

Sometimes the objective of launching an NFO is to fill a gap in AMC's product offerings or capitalize on a hot trend. The AMCs objective is to offer all kinds of schemes under the same roof so that the investors don't have to approach other AMCs. 5/11

According to SEBI guidelines, AMCs can only have 1 scheme per category except for Sectoral/Thematic, Index funds and FOF categories. Hence you might see an AMC offering a wide range of schemes that target specific sectors and track indices. 6/11

The other reason why NFOs are sold hard, particularly by banks and wealth managers is because of the higher incentives in smaller schemes. Here are the expense ratio slabs defined by SEBI. 7/11

Before investing in an NFO, make sure you analyse similar schemes that already exist. Past performance is no guarantee of future results but investing in an existing scheme with a known track record is always better than investing in a completely new offering. 8/11

Unless the NFO provides access to certain styles or geographies without alternatives, it doesn’t make sense to invest. It's better to wait for the new scheme to perform before investing. Most importantly, before investing in an NFO ensure it fits your portfolio requirement. 9/11

New funds tend to have fancy marketing and really good looking backtests, which mean nothing. While it's tempting to invest in new schemes, you'll end up cluttering your portfolio and paying unnecessary fees.
Remove the "F" in NFO and you’ll have your answer😀
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If you're just starting your investing journey, there's no better place to learn the basics of mutual funds than the personal financial module on Varsity👇

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https://twitter.com/ZerodhaVarsity/status/1365225131539263494?s=20