Why you should be careful while investing in NFO?

POSTED BY manish ON June 10, 2009 COMMENTS (22)

Here comes a new NFO!!!

In this post we will discuss why one should really be cautious about NFOs and why in general its better not to invest in any NFO. Have you heard about NFOs and IPOs hitting the markets while markets are doing bad? Why is it so? this is a question we must answer to.

NFO

The reason why most of the NFOs and IPOs hit the markets when markets are doing extremely good is to exploit the emotional buying of investors. Its a common thing that investors tend to get in rising markets then falling markets.

So when markets are flying high and all kinds of NFOs with fancy names (some good funds and some junk funds) will hit the market claiming how different they are and how they ย are ought to be a huge success.

If you are a new reader , you may like to read some terms and terminologies

Understanding NFO’s

No Proven Track Record:

Every NFO will come with its own idea and logic, but investing is never easy and you can see true colors only after few years. They can be success or failure!

So why to go for something which can either fail or succeed, instead why not go for some existing fund which already has proven its mettle, which has given superb returns over long term and has excellent management. These funds have high probability to continue their performance.

Its like: what would you prefer? Take risk of marrying someone you don’t know or someone who is already a good friend and you know him/her over years?

Cheap NAV at Rs 10:

Most NFO offer comes with NAV of Rs 10 and the biggest myth of investors is that its a cheap fund and hence better than a fund with NAV of 20 or 100. NAV growth is nothing but growth of investments and it does not matter what NAV rate is! Rs 10 NAV mutual funds and Rs 100 NAV mutual fund will grow with same rate if their investment quality is the same. There is no reason to invest in a fund that has low NAV.

Myth of High Dividend from Low NAV Fund:

Majority of our “Educated” Agents will tell you that buying low NAV fund will help you in getting more Dividend (if you choose Dividend option) because Dividend is declared on number of Units held. So you will get more units of mutual funds if you invest in low NAV funds!

Whatever he says is true, but he himself does not know that it’s the investor’s money coming back to him and NAV value will again go down by that much value. So in real money terms, there is no benefit of dividend option. See difference between growth and Dividend options

Agents will market it very well and try to push the NFO’s for Sale:

Everyone wants to make money! What other product can be better for a mutual funds agent than an NFO!!! Agents get High commission on selling NFOs and hence they will do anything to sell it. They will spend money aggressively for Marketing as its taken back from Investors eventually and not the AMC. Caution, Be-aware!

Does that mean all NFO’s are Bad?

No! Every existing mutual funds was NFO once upon a time. You should go through the NFO Offer prospectusย to find out whether the offer seems interesting and logical enough for you to invest in it. Only then you can go for it. But just understand that only a handful of all NFO’s become good funds.

So out of 1000 mutual funds only a few like 20-30 will be extremely outstanding funds. So the decision is yours! Do you want to take the chance? Or you want to wait and let it show its true colors before you get into it.

Which is the new hot NFO in the Market?

Reliance Infrastructure Fund is the new name in the market these days. All the things which I talked above applied to this too. Before Investing in it read about it in acute detail. I will provide my short view on this.

Reliance Infrastructure Fund is a Sectoral Fund (Infrastructure). This sector looks attractive over next few years. The picture would be more clear after the Budget is out because that’s when we exactly know what is Govt plan in this particular sector.

If its a bad news then the stocks in these sector will take a hit and suddenly it can become a reason for suicide for its investors. Why not wait till the budget and then ๐Ÿ˜‰

We also have some good Infrastructure funds in the market with proven record like UTI Infrastructure Fund and TATA Infrastructure Fund. It depends on you now what you want to do? The Fund will also put money in derivatives segment, which can again make the fund more risky and rewarding. Read more about Reliance Infrastructure Fund NFO details.

Conclusion: Investing in NFOs can be like shooting in dark for retail investors! A better idea for them is to invest in something which has more probability of performing well. NFOs can be extremely successful because of their unique idea or investing style but its too tough to choose them successfully. Better to avoid them!

Here are my 2 day trek pics , Have a Look. I am putting the best Pic taken by me ๐Ÿ™‚

Why you should be careful while investing in NFO?

Before anyone asks, I must tell that its taken by a normal point and shoot camera ๐Ÿ™‚ Its just a result of Interest and Willingness to take some good pic + Macro Mode ๐Ÿ™‚

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22 replies on this article “Why you should be careful while investing in NFO?”

  1. manoj says:

    Nice article.

  2. ankur says:

    Dear Sir
    Should I go with sbi advantage nfo.

    Regards
    Ankur

    1. Yes you can take it if you are clear about it

  3. Chetan Ambi says:

    Nice article Manish.. I was planning to invest in PPFAS’s NFO. After reading this and article and discussing in the forum I dropped the idea. Thanks a lot again!!

    1. Muthu Krishnan V says:

      ppfas seems to be a different player. They are already established in PMS space and also they do not have plans to have multiple equity funds. You can invest once it is re-opened for subscription.

      1. Chetan Ambi says:

        Though they have only one fund i.e PPFAS Long Term Equity Fund it’s better wait for its performance for couple of years and then invest in it. Yes it looks promising and follow value investing style.

        1. We would love to know your review about the PPFAS fund later !

  4. radhe says:

    Enjoyed reading the article .
    Keep it up man.
    Thumbs up…

  5. Manish Chauhan says:

    @Jose

    As always , its not very important to choose a ulip . The other important thing is weather its a right product for you or not . I do not individually track any ULIP . There more important considerations for you . You must go through https://www.jagoinvestor.com/2009/05/most-important-questions-you-should-ask.html

    see this link for a short review : http://mohanbn.com/blog/analysis-of-sbi-life-smart-ulip

    Manish

  6. jose says:

    Hi Manish,

    wanted to know your opinion regard SBI SMart ULIP ? Is it worth investing over a period of 5 years.?

  7. Manish Chauhan says:

    @Abimanyu

    Not sure about that plan . But just one feature can not make a product great .. see my post on gfactor to evaluate how good it is for you .

    Manish

  8. Abimanu says:

    Hi Manish ,

    thanks for your valuable suggestions,
    what about a scheme of Birlasunlife Platinum plus ,which will give over 7 years higest NAV recorded.

    pls tell that is it really worthfull one or not ?

  9. Manish Chauhan says:

    @Vishu

    woo.. Nice to know that . I am glad that people are liking the articles and it helps them a lot . The most important thing for retail investors like us is to understand what we do , so that we learn to take responsibility ๐Ÿ™‚ .. Thats important for long term success .

    Manish

  10. Vishu says:

    Hi Manish, Last time exp with ICICI ULIP (as I invested without thinking in it and by listening agent) and then you inspired me to read and find out before inveting. So this time before going for Realiance NFO I read ur article and it was very helpful to take any decision..thanks for ur "easy to understand" and on time articles for ppl like me… ๐Ÿ™‚
    Vishu

  11. RADHAKRISHNA says:

    i m investing 10K. As an infrastructure analyst, I can say that whatever the budget outcome will be, Govt can not ignore one sector and that is Infra.But Manish you r right when u say that one can invest anytime as it is an open ended scheme.Now whatever be the advertising strategy and Hulla..the investor has to take a chance.So in my point of view, invest moderately and watch out for the performance.

  12. Manish Chauhan says:

    @Papi

    OMG!! , have you gone nuts investing 4-5 lacs in this . Its not the question of good fund or bad fund and how it will perform , you are violating the fundamentals principles of investing and personal finance .

    from your words it looks like your Risk appetite is moderate and not very high . So please hold on . Its a sectoral funds and they totally depend on the infrastructure sector . BUDGET is still not out and dont speculate on the sector just because some people are saying like that .

    Remember Reliance Power IPO , they said it will open at 900 directly or may be 1000 and see whats the status .

    Atleast wait till budget and have clear view about the fund future . Invest systematically in the fund over long term .

    Incase you have 10-20 crores with you , i wont mind if you invest 4-5 lacs as per your plans , but if you are a general person like anyone else . Just Sit tight and dont take idiotic move like that .

    It also means that you may miss the sudden profits which you "may" get out of it . At that time you will feel bad for not investing , but understand that managing risk should be the main motive and returns are secondary.

    Dont get too Greedy in this , it kills someday if not this time . Look for better than average returns with affordable risk . I would recommend putting some money in this after budget.

    Btw , why are you so desperate in investing in this NFO before the 23rd . NFO closes 23rd does not mean that you cant invest in it later. Its an open ended fund , so you can anytime put money in this. see : http://money.rediff.com/money/jsp/nfo_details.jsp?schemeCode=14055376

    Agreed that you may miss some "strong moves in the start" . but then it also means you "may" be saved from heavy losses , anything can happen , its you who have to decide what you want .

    Manish

    Apologies for being rude.

    Manish

    1. Ashutosh sinha says:

      I have noticed one thing that is common in all offers by cons – They tend to rush you. Despite being a open ended fund, the agents will exploit gullible investors by saying that the NFO closes on XY date.

      Rule of thumb:- Never rush before investing your money. It’s not gonna rot anyway in a savings account. You must understand what it is that you are doing. Don’t trust anyone when it comes to money and making money from your money.

      All being said, there will always be group of uninformed investors who are made to believe that the offer they have in front of them has a +ve NPV. If so was the case, it wouldn’t be up for easy grab.
      I have not invested a single penny till date in Stocks or MFs. And I will not do it till I fully understand what it is that I am doing. But I think that day is not very far.

  13. papi says:

    hi munish ,i had read the comments you gave on reliance infrastructure fund, still i am little confused on this because the closing date for this fund is 23rd and today is allready 19th i was thinking to invest 4-5 lakh in this but after reading your comments i am little scared and confused what to do as i am not a big bull in this so i have no idea what to do
    as my friend who is working in india bulls suggested me that this will open in 11 or 12 may be so even if open in 11 means 10% better then bank but what i am scared is if goes down then i had lost money in shared in last 4 months around 1 lakh so can you pls give me suggestion should i invest or not THX

  14. Manish Chauhan says:

    Yeah .. this is the reason why many people dont like stock markets and mutual funds because they lost too much money because of a wrong decision which was triggered by some one else .

    Regardign RIF , It can turn out to be a good fund , but again i would say , whats the reason for going with it when you already have good funds like UTI and TATA , which themselves are great funds ๐Ÿ™‚ . Take your call .

    Manish

  15. Anu says:

    Hi manish, thanks for the eye opening article. You are so true. I have friend of mine who put her hard earnt momey in some NFO when the sesex was at 20k levels. She lost all her money n now the face vale of 10 rs is gone down to 3 rs. she has completely lost faith in MFs even the good ones.. i shall ask her to read ur mail.

    Regarding Reliance infra fund, it is coming from one of the best mutual fund house and definately the current govt is going to focus on infra…. So lets see.

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