Around 20 new fund offers (NFOs) are open for subscription in the market currently. These include nine fixed maturity plans (FMPs), five gilt funds, two ETFs, two fund of funds (FoF), an equity linked saving scheme (ELSS) and an index fund. Most mutual fund experts recommend funds that have been around for a while and provide a track record over new offerings.

Let's understand what exactly is an NFO and how it works

An NFO is the first time subscription offer for a new scheme launched by the asset management companies (AMCs). They are intended to raise capital for the fund and attract investors.

Factors to consider while choosing an NFO

Experts say that NFO could make sense only when the fund offers something unique that is not available in the market.

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"Before taking the call, it's vital to look at the AMC's reputation. The fund houses have multiple funds in the market. So, one can look at how the funds have been managed during up and down cycles. Fund manager's track record also plays a significant role here," said Saloni Sanghvi, Founder at My Wealth Guide in a conversation with CNBC-TV18.

Additionally, investors can look at the objective and the motive behind the new fund offer. Also, returns of other funds in that category should be checked.

"If it is an alter existing category, look at the other funds in the category to see the kind of returns. On top of these, look at the risks associated with that category," Sanghvi said.

Should one have NFOs in investment portfolio?

Investors should first understand the concept of right asset allocation, look at their objectives and risk-taking ability before deciding on any investment.

"If the existing portfolio has any gap or if any restructuring is required, only then they should go for an NFO. However, there are several factors to consider here before selecting them," Shangvi said.

With NFOs, investors are well aware of their exposure. There are some strategies that have gained momentum lately, like factor investing or themes like EV, among others. Now, there are not many options that one can currently look at. Given that, NFOs could give the exposure to these strategies, if it at all fits into the overall portfolio.

Next is diversification.

According to Sanghvi, this will also give investor an opportunity to invest in an asset class that's completely new for their portfolio or even a new geography. '

"I believe that even if there are unique strategies, it is better to wait for some time and see if the theme or investment strategy plays out as intended before really investing in a fund," she suggested.

If there's already an active scheme with a track record, it's better to invest in that.

"This is simply because there is a lot of data available for that scheme and it's very easy to see and determine if it's the right fit or not," she added.

Track record helps one in understanding the kind of risk a fund is taking and how well it does in a bull market. Relying just on the fund houses or the fund manager performance in another fund is not sufficient.

"With NFOs, we know that there's no solid track record. We know the broad strategy and mandate of an NFO, but we don't know what the constitutes are going to be," Sanghvi told CNBC-TV18.

Whereas when investing in an existing fund, investors would know exactly what they are getting into.

Also, NFOs come with high cost. Every fund charges a fee which is a percentage of the portfolio and gets deducted from the returns generated. This is called the expense ratio. A fund with a smaller asset under management (AUM) can charge a higher expense ratio as compared to a fund with a higher AUM,

On top of this, there are various marketing charges as initial NFO expense and an even higher distributor commission. So, this results in higher expense ratio.

However, there are certain exceptions still where investors can look at NFOs.

"Index fund is a decent choice since investors will usually have a track record. Similarly, they can look at international funds which invest in existing funds internationally, which again have a track record," Sanghvi told CNBC-TV18.

"There are multiple target majority or fixed majority funds in the market too, but they may not exactly match the time horizon. Investors can evaluate and decide if that's right for them," she added.

To conclude, if the time horizon of an NFO coincides and the individual knows his/her investment horizon, then this could definitely be a good option.

Which is a better approach in NFO- SIP or lump sum?

Sanghvi thinks that SIP is a better approach versus a lump sum.

"However, I feel the investment mode depends on the flow of funds for the investor. This is regardless of whether it's an NFO or any mutual fund investment. If an investor has a regular income, then that should match the investment mode and an SIP is preferable," she said.

"But if an investor has lumpy income or funds available currently, then they should invest 33 percent as the first lump sum and then the rest as a systematic transfer plan over the next two months. This is because markets are expanded or expected to trend upwards over a longer period of time," she further said.

Is it ever a good idea to redeem from an existing fund just to buy an NFO?

Redeeming an existing fund can result in exit loads or depending on how long investors held it, the taxation and other costs which eventually reduce the returns.

"But, if f the investor is rebalancing the portfolio or booking profit, then he/she can look at redeeming from the existing funds and invest into an NFO. Investors should focus on the overall portfolio and not just jump in because there is a new fund launched," Sanghvi told CNBC-TV18.

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