NFO vs existing mutual funds: Which one should you choose?

Investing in mutual funds is a popular choice for individuals looking to grow their wealth over time. While many investors prefer well-established mutual funds, others explore opportunities in New Fund Offers (NFOs). Both options have their benefits and risks, and understanding their differences can help investors make informed decisions.

This article will explain what an NFO is, the types of NFOs, how they differ from existing mutual funds, and the factors to consider before investing in either. By the end, you’ll have a detailed understanding of which option suits your investment goals.

Table of contents

1. Understanding NFO
2. Two types of NFOs
3. NFO vs mutual fund: Key differences
4. Tax implications of NFOs vs mutual funds
5. Risk comparison: NFO vs mutual fund
6. Pros and cons of NFOs
7. Keep this in mind before investing in an NFO
8. Market timing and NFOs
9. Why you should invest in NFOs
10. How to invest in an NFO vs mutual fund?
11. Why should you invest in existing mutual funds
12. Pros and cons of existing mutual funds

Understanding NFO

A New Fund Offer (NFO) is the first-time launch of a mutual fund scheme by an asset management company (AMC). During this phase, investors can buy units at a fixed initial price. The AMC collects funds from investors and invests them in stocks, bonds or other securities based on the fund’s strategy.

NFOs allow investors to participate in a mutual fund from the beginning, often with innovative themes or strategies. However, they come with uncertainties since there is no past performance to assess. Investors should evaluate the fund’s objective, asset allocation, and AMC’s reputation before investing.

Two types of NFOs

Open ended NFOs

Open-ended New Fund Offers (NFOs) allow investors to enter and exit at any time after the NFO period closes. These funds provide liquidity and flexibility, similar to regular mutual funds, as investors can buy or redeem units based on the fund’s Net Asset Value (NAV). This makes them suitable for those seeking convenience and accessibility.

Closed-ended NFOs

Closed-ended NFOs have a fixed maturity period, meaning investors cannot withdraw their funds before maturity. Once invested, they must stay until the fund matures, unless the fund is listed on a stock exchange allowing them to sell units to other investors.

NFO vs mutual fund: Key differences

Historical performance

Existing mutual funds have a performance track record that helps investors analyse past returns*, risk levels and overall consistency. On the other hand, New Fund Offers (NFOs) lack historical data, making it difficult to evaluate their potential.

*Past performance may or may not be sustained in the future

NAV (Net Asset Value)

An NFO begins with a fixed offer price per unit. Existing mutual funds, however, have fluctuating NAVs based on their portfolio performance and market conditions.

Market risks

Since NFOs launch with a newly created portfolio, they carry higher uncertainty. Existing mutual funds have an established investment strategy and past market performance, helping investors make informed decisions.

Investment strategy

The strategy of an existing mutual fund is already known and tested, whereas an NFO may introduce a new and unproven investment approach, increasing unpredictability.

Liquidity

Open-ended mutual funds allow easy buying and selling, providing liquidity. However, closed-ended NFOs require investors to remain invested until maturity unless traded on the stock exchange.

Read Also: Mutual Funds vs Equities: Key Differences

Tax implications of NFOs vs mutual funds

From a tax perspective, New Fund Offers (NFOs) and existing mutual fund schemes are treated in the same manner. The taxation of an investment does not depend on whether it is made through an NFO or an already launched mutual fund, but on the type of mutual fund scheme and the holding period.

For equity-oriented mutual funds, capital gains tax is determined based on how long the units are held. Short-term and long-term capital gains are taxed as per prevailing equity taxation rules. Similarly, any income distributed by the fund, such as IDCW (Income Distribution cum Capital Withdrawal), is taxed in the hands of the investor according to applicable income tax slabs.

For non-equity mutual funds, taxation rules differ and are based on current tax regulations applicable to debt and other non-equity schemes.

Risk comparison: NFO vs mutual fund

One key difference relates to performance history. NFOs do not have a track record, which makes it difficult for investors to assess how the strategy has behaved across different market cycles. Existing mutual funds provide historical data that may help investors understand volatility patterns, portfolio turnover, and consistency, though past performance does not indicate future outcomes.

Portfolio construction risk is also relevant. During the initial phase, NFOs may take time to deploy capital fully, which may temporarily affect risk exposure. Existing funds usually have fully invested portfolios, offering clearer visibility into sector allocation, stock selection, and concentration levels.

Liquidity and execution risks may also vary slightly in the early stages of an NFO, especially if the fund size is small. However, these factors generally stabilise as the scheme matures.

Key risk considerations include:

• Lack of performance history in NFOs
• Deployment and execution risk during the initial period
• Category-level market risk applicable to both NFOs and existing funds
• Manager and strategy-related risks

Past performance may or may not be sustained in future.

Pros and cons of NFOs

Pros

Low initial offer price: NFOs start with an offer price usually set at Rs. 10 per unit. This allows investors to enter at an affordable price, potentially benefiting from future growth.

Unique investment opportunities: Some NFOs introduce new investment themes, sectors or strategies that may not be available in existing mutual funds. This gives investors access to fresh market opportunities and innovative financial products.

Diversification: NFOs can help investors diversify their portfolios by adding exposure to new asset classes, sectors or market trends that existing funds may not focus on.

Cons

No performance history: Since an NFO is newly launched, investors cannot analyse past performance or risk-adjusted returns, making investment decisions more uncertain.

Higher risk: NFOs come with uncertainty as their success depends on the fund manager’s expertise and market conditions.

Liquidity constraints: Closed-ended NFOs do not allow withdrawals before maturity, limiting investor flexibility unless listed on a stock exchange.

Keep this in mind before investing in an NFO

Investment objective: Before investing in an NFO, ensure that its objective matches your financial goals, whether growth, income or stability.

Fund manager’s track record: Research the fund manager’s experience and past performance to understand their expertise in handling investments. A skilled manager can significantly impact returns.

Fund category: Identify whether the NFO is an equity, debt or hybrid fund. Choose one that aligns with your risk tolerance and investment strategy.

Expense ratio: Some NFOs may have higher initial charges, which can impact returns. Compare costs before investing.

Market conditions: The success of an NFO depends on prevailing market trends. Assess whether it’s the suitable time to invest.

Read Also: Index vs Equity Funds: Meaning, Differences & Investment Suitability

Market timing and NFOs

NFOs are launched based on product strategy, regulatory approvals, and asset management company planning, not because markets are at a favourable or unfavourable level. An NFO investing in equities will still be exposed to market volatility from the day of deployment, regardless of whether markets are rising, falling, or moving sideways. The initial net asset value being set at a fixed level has no bearing on future performance.

From a practical perspective, attempting to align NFO investments with short-term market views may not be effective. Equity-oriented funds are typically designed for long-term participation, where outcomes depend more on business fundamentals, portfolio construction, and time in the market rather than entry timing.

Why you should invest in NFOs

• If you want to invest in a unique theme or sector not covered by existing funds.
• If you are a long-term investor willing to take calculated risks.
• If you trust the fund house and fund manager’s expertise.

How to invest in an NFO vs mutual fund?

Investing in a new fund offer (NFO) and investing in an existing mutual fund follow largely similar processes. The difference lies mainly in the availability window and the stage of the scheme, not in the mechanics of investing.

• How to invest in an NFO: An NFO is available for investment only during a limited subscription period announced by the asset management company. Investors may invest during this window through online platforms, mutual fund websites, distributors registered with AMFI, or through demat and trading accounts, where applicable.
• How to invest in an existing mutual fund: Open-ended mutual funds are open for investment on an ongoing basis. Investors may invest at the prevailing net asset value on the day of transaction.

Why should you invest in existing mutual funds

• If you prefer stability and historical performance as a guide.
• If you seek liquidity and the ability to redeem units at any time
• If you want to invest based on proven market trends.

Pros and cons of existing mutual funds

Pros

Historical performance data: Existing mutual funds have a track record, allowing investors to analyse past returns, risk levels and consistency before investing.

Lower risk: Since these funds have a defined investment strategy and proven performance, they are generally less risky than new funds.

Liquidity: Open-ended mutual funds allow easy buying and selling of units, offering investors flexibility to enter or exit anytime.

Cons

Potentially higher NAV: Depending on fund performance and market conditions, the per-unit value may be higher than the offer price during the NFO. However, during market dips or if the fund is underperforming, the NAV may fall below the offer price.

Limited innovation: Existing funds may follow traditional investment strategies and may not introduce new themes or sectors like some NFOs do.

Read Also: Mutual Funds Vs. Stocks and Bonds: Understanding the Difference

Conclusion

Both NFOs and existing mutual funds have their advantages and risks. While NFOs provide opportunities for diversification and unique investment themes, existing mutual funds offer stability and a proven track record. Your choice should depend on your investment goals, risk appetite and market research.

FAQs:

Is investing in an NFO riskier than an existing mutual fund?

Yes, investing in an NFO is riskier than an existing mutual fund because it has no past performance to evaluate. The fund’s success depends on market conditions and the fund manager’s strategy. On the other hand, existing mutual funds have a track record, making them more predictable and less uncertain for investors.

Can the high NAV of an existing mutual fund impact my returns?

No, returns depend on percentage growth, not the NAV value.

How important is market timing when investing in an NFO?

Market conditions can impact an NFO’s performance, but a strong fund manager and strategy matter more.

Are existing mutual funds better for risk-averse investors?

Yes, as they provide historical data and lower risk compared to NFOs.

What should I consider before investing in an NFO?

Look at the fund’s objective, fund manager’s experience, and market conditions.

How does market saturation affect existing mutual funds?

Highly saturated markets may limit future growth potential, impacting returns.

What does a performance plateau in a mutual fund mean?

It means the fund's returns have stabilised, indicating limited future growth potential.

What are the tax implications of investing in NFOs vs mutual funds?

From a tax perspective, there is no difference between investing in a New Fund Offer (NFO) and an existing mutual fund scheme. The tax treatment depends on the type of mutual fund (equity-oriented or non-equity) and the holding period, not on whether the investment is made during an NFO or after the fund is launched.

How can I invest in an NFO?

Investors can invest in an NFO through online platforms, distributors registered with AMFI, or directly with the asset management company. Applications are submitted during the offer period at the initial price.

Can I exit a closed-ended NFO before maturity?

Closed-ended NFOs generally do not allow redemption with the fund house before maturity. However, such schemes are typically listed on recognised stock exchanges, which may provide investors with an option to exit by selling units in the secondary market, subject to market liquidity and prevailing prices.

Are NFOs suitable for beginner investors?

NFOs may require additional consideration for beginner investors, as they do not have a performance track record that can be reviewed. Some beginners may find it easier to understand and evaluate existing mutual fund schemes with established histories and clearer risk characteristics, especially when investing with longer time horizons.

Past performance may or may not be sustained in future.

What fees are associated with NFOs compared to mutual funds?

The fees applicable depend on the type of scheme and the plan selected, not on whether the investment is made during an NFO or in an existing mutual fund. Mutual fund schemes charge fees in the form of an expense ratio, which covers fund management and operational costs and applies both during and after the NFO period.

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