Monday, April 17, 2006

New Fund Offers (NFO) / Mutual Fund IPO's

Generally, new funds are not recommended. However, it is not to say that these funds are bad, but that one should wait for these funds to prove their worth over a period of time.

NFO end up being more expensive. They may not charge any entry load but they charge initial issue expenses which can be up to six per cent of the amount that they collect during the new fund offer period. But investors do not come to know about it as it is amortised over a period of five years, rather than being charged up-front.

Moreover, nothing is known about the new funds, and they only have promises to back their claims. One might argue that past performance does not guarantee future performance, and therefore, nothing can be said with certainty even for the well established funds. This is true. But the fact is that this uncertainty is at its height in case of new funds. For an established fund, at least you know where it invests, and that the fund manager has shown the ability to manage the fund well in turbulent times.

Investing in a mutual fund involves making a choice from the various options available. And in the absence of any distinct advantage that a new fund can provide, a wise decision will be to choose an established fund about which you know at least something.

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