MUTUAL FUNDS: Investing in NFO? 4 key factors you need to know

SAI displays all of the statutory and different info pertaining to the AMC.

A New Fund Supply (NFO) doc is issued by an asset administration firm when it’s providing buyers a brand new mutual fund scheme. In monetary yr 2020-21, nearly 88 NFOs had been launched by varied fund homes, which is 75% increased than the final 10-year common launch per yr.

NFO paperwork common between 100 and 150 pages. Studying them in depth is a time-consuming course of. Allow us to focus on how an NFO is totally different from Preliminary Public Supply (IPO), what are the vital points that one ought to search for in such a doc earlier than investing within the NFO.

NFO vs IPO
Usually buyers are confused between NFO paperwork and IPO prospectus. IPO doc is issued by an organization for elevating funds and it consists of knowledge comparable to goal and utilisation of funds, monetary danger of investing, projected monetary statements, key managerial workers, and so on. However, NFO paperwork include Scheme of Data Doc (SID) and Assertion of Extra Data (SAI). The SID gives info comparable to funding goal, asset allocation sample, funding technique, profile of the fund supervisor, benchmark index, and so on. SAI displays all of the statutory and different info pertaining to the AMC.

Funding thesis of the scheme
It is vitally essential to learn this a part of the doc to know the funding targets of the scheme. This info might be obtained from the SID, the place the mutual fund states what it goals to realize when it comes to returns and the way they plan to realize the identical. Right here, they point out how the scheme plans to allocate its belongings; like, whether or not it’s an equity-oriented scheme or predominantly invests in debt and cash market devices or follows a hybrid strategy.

Asset allocation technique
Traders want to concentrate to this part because the mutual fund scheme reveals its proposed asset allocation technique among the many varied asset lessons comparable to fairness, debt, commodities, REITs, and so on. Typically, it present a variety of allocation exhibiting the minimal and most publicity throughout varied asset lessons. In truth, this half will assist buyers to evaluate whether or not their danger profile matches with that of a mutual fund scheme.

Inventory choice rationale
That is one other essential a part of the doc. On this part, the mutual fund scheme states the rationale behind securities / inventory choice. The scheme additionally discloses its strategy in the direction of inventory choice; particularly, top-down strategy or bottom-up strategy or basic or technical strategy or a mix of all. Other than the rationale, this a part of the doc reveals the scheme’s philosophy of funding. As an illustration, a scheme may comply with worth investing or progress investing or mixture of each. Thus, this part reveals the funding course of and methods intimately.

Observe document
The observe document and market fame of the fund home are essential elements to contemplate. This may be noticed by checking how lengthy the fund home has been in existence, what number of mutual fund schemes it at the moment presents and the efficiency of such schemes. A longtime fund home which has a greater observe document is all the time extra preferable. Equally, it’s prudent to examine the observe document of a fund supervisor by checking the efficiency of the schemes at the moment managed or had been managed up to now by him, or his work expertise within the mutual fund business, and so on. The fund supervisor is the one who really manages cash invested within the scheme.

To conclude, as an investor one ought to learn no less than the above tips that could have a greater understanding of the mutual fund scheme and the fund home earlier than investing within the new schemes.

The author is a professor of finance & accounting, IIM Tiruchirappalli

DECODING the NFO
NFO paperwork include Scheme of Data Doc (SID) and Assertion of Extra Data (SAI)
SID gives info comparable to funding goal, asset allocation sample, funding technique, profile of the fund supervisor, benchmark index, and so on
SAI displays all of the statutory and different info pertaining to the AMC