NFOs vs current mutual funds: Where should you invest and why?

Summary

Most wealth advisors tell investors to refrain from investing in a fresh mutual fund. They advise them to examine the performance of past few years before taking an investing decision

Wealth advisors typically recommend investors to invest in an existing fund because you can examine its past returns and compare the same with other schemes in the same category.

Mutual funds: As a new investor, if you want to invest in a mutual fund scheme, you typically have two options to choose from: either invest in a new fund offer (NFO) or in a current fund.

There are advantages to investing in both categories of mutual funds. Here we explain each of them in detail.

Investing in a new fund

A new mutual fund may offer a broader scope of earning high returns which an existing fund does not. Additionally, there could be some innovative combinations of stocks in the new funds which are not available in any of the existing schemes.

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Some of the examples of such innovative funds are the Active Momentum mutual fund and the sector rotation mutual fund.

“When it comes to investing in a new fund or existing fund, there is no rule of thumb. There are multiple factors which make a fund investment-worthy, including the fund manager, the category it belongs to, the current market cycle and past performance. When you invest in a new scheme, although there is no past performance to base your decision on, all the other criteria are still there,” says Deepak Aggarwal, Delhi-based chartered accountant and wealth advisor.

Investing in an existing fund

Most wealth advisors, meanwhile, recommend investing in a current mutual fund because you can examine the past returns of that scheme and compare them with other schemes in the same category. One could also examine other financial metrics in an existing scheme, including the Sharpe ratio, standard deviation, and size of the fund before taking an investment decision.

“We often tell investors not to invest in a new scheme because there is no track record of those schemes. Without historical data, one can not make an informed decision. Typically, one should invest in a scheme that has been around five years or so,” says Sridharan S., Sebi-registered investment advisor, and CEO & principal officer, Wallet Wealth.

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