NFO vs SIP: Which Is Better for Investors?
CA Bhaskar Abhishek
11/19/20243 min read
Mutual fund investing has many options to choose from, and two of those choices include New Fund Offers (NFOs), and Systematic Investment Plans (SIPs). Each type of approach has its characteristics, advantages, and disadvantages that are peculiar to it. However, they serve different demands of investments. It’s time to take a closer look at NFOs and SIPs so that you can decide which one might suit you the best.
What is an NFO?
A New Fund Offer or NFO as it is popularly known is the first time that an Asset Management Company (AMC) introduces a new mutual fund. In an NFO, the general public directly invests in mutual fund companies and can buy units of mutual funds at a fixed price of Rs 10 per unit.
Purpose: NFOs are floated to open up new mutual fund industry schemes.
Timing: New Fund Offerings or NFOs can only be subscribed to during the new offer period.
Investment: Normally, NFOs are available only at the appropriate subscription price which is an upfront amount.
What is an SIP?
SIP is a way of investing in mutual funds by making periodic and small Investments at fixed intervals in the fund’s name. SIP is just not the disciplined way of investing a large amount of money at one go but it also allows you to invest a fixed amount at stated intervals (for example, monthly).
Purpose: SIPs allow for controlled and sustainable investing.
Timing: SIPs can begin at any time because they are associated with ongoing mutual fund schemes.
Investment: SIPs are affordable to all investors since they require small, regular amounts of money to be invested.
NFO Vs SIP – Key Differences
Nature :
NFO - One-off payment at the point of the creation of a new fund. One-time purchase during the launch of a new fund.
SIP - Contribution of monies into an existing fund on a continuous and frequent manner.
Investment Type:
NFO - Single/’Lump Sum’ payment.
SIP - Fixed or Periodic Contribution
Risk Level :
NFO - Higher, as the fund's track record is unknown.
SIP - Lower, as SIPs eliminate volatilities of the market by averaging.
Cost of Units :
NFO - Fixed price for NFO period.
SIP - Varies based on market NAV over time.
Flexibility :
NFO - Limited to the NFO period.
SIP - Flexible to the highest extent.
Suitable For Investors :
NFO - Buyers willing to take higher risk for potential rewards.
SIP - Buyers looking for stable extended returns on their investments.
Advantages of NFOs
Opportunity for Early Entry: This is usually so if the new fund you are placing your money with at the time of its inception is among the best.
Thematic or Innovative Funds: NFOs bring to market new funds that are likely to have new approaches that may not be available in other products.
Potential for Higher Returns: If the fund manager is able to execute this strategy, current investors will be in a winning position.
Disadvantages of NFOs
No Performance Track Record: Firstly, the value of NFOs has not got benchmark historical data for the assessment of their possible value.
Market Timing Risk: Investing at the wrong time may lead to suffering a loss.
Limited Information: For the above reasons, investors can only rely on the prospectus which at some point is usually wishful thinking.
Advantages of SIPs
Disciplined Investment: It also promotes the setting of automatic investment practices.
Rupee Cost Averaging: It helps reduce the effects of variable market swings because it offers customers a way of investing at various times.
Affordable: Simple and more measurable portions are especially suitable for the newcomers.
Long-Term Wealth Creation: Most suitable to develop a large database cumulatively.
Disadvantages of SIPs
Limited Short-Term Gains: SIPs are not for people who look forward to getting gains in the short run.
Missed Opportunities: Especially in bullish markets, the lump-sum investors may benefit more out of the total bunch.
Which is Better: NFO or SIP?
This is the case because investors must consider several factors when deciding between investing in NFO and SIP including the investors investment plan, risk appetite, as well as his or her financial status.
Choose NFO if:
You are an experienced investor and you are willing to go for a higher risk than what is offered by more conventional investment products.
The NFO complements your Investment Strategy or brings in a new theme of investment.
You have cash that you can afford to part with for the lump sum investment.
Choose SIP if:
You are not an experienced investor, or you do not like taking unnecessary risks.
You seek to invest methodically without regard for when to invest in the market.
This is your focus hence, you are looking for long term wealth creation with proper investment.
Conclusion
There is evident that NFOs and SIP have definitively advantages and disadvantage. Whereas NFOs give the hope of entering a fund from its very start, SIPs bring order and consistency to achieve long term aims. To determine your suitability for investing in Axiory, consider the following factors; Financial objectives, tolerance to risk and time horizon. It is always important to understand that managing an investment is always unique to an individual’s financial plan.
Article by CA Bhaskar Abhishek