Things to Know Before Investing in Mutual Fund NFOs

In 2018, SEBI introduced categorisation norms for mutual funds to prevent duplication of schemes and ensure that each scheme adheres to its stated investment mandate. The objective was to help investors make informed decisions and simplify the mutual fund selection process.

However, the rapid pace at which mutual fund houses are launching new fund offers (NFOs) raises questions about whether this objective is truly being met.

In 2025 alone, mutual fund houses launched over 200 equity-oriented schemes. Several newly launched and small-sized fund houses have joined the bandwagon, and many more NFOs are lined up for launch in 2026.

Why are mutual fund houses launching so many NFOs?

Fund houses typically launch NFOs during market rallies to capitalise on positive market sentiment and to fill gaps in their existing product offerings. Investors, encouraged by rising markets and improving returns, often enter during such uptrends, resulting in strong inflows into certain NFOs.

In addition, mutual fund houses have increasingly focused on passively managed funds and innovative products to attract investors.

Unlike other categories, there is no cap on the number of Index Funds, ETFs, Fund of Funds, Sector/Thematic Funds, and close-ended schemes that a mutual fund house can launch.

As a result, these categories have witnessed the highest number of launches in recent years. Many fund houses see these segments as an opportunity to gather assets under management (AUM).

Moreover, since most of these schemes are passively managed, there is limited pressure on fund managers to outperform peers or benchmarks.

Are NFOs worth considering?

While NFOs offer investors a wide range of choices, they also add to the confusion. The sheer number of launches can make it difficult to identify the most suitable schemes for your portfolio.

Often, investors are drawn to NFOs because they are typically launched at an NAV of Rs 10. This creates the perception that the fund is 'cheap' compared to older schemes with higher NAVs.

However, this is misleading.

Consider this example...

Suppose you invest Rs 5,000 each in two large-cap funds with similar portfolios. Fund A has an NAV of Rs 10, while Fund B has an NAV of Rs 50. Your investment would fetch you 500 units of Fund A and 100 units of Fund B.

Assuming both funds grow by 25% over one year, the NAV of Fund A would rise to Rs 12.5 and that of Fund B to Rs 62.5.

The value of your investment would be:

• Fund A: 500 units x Rs 12.5 = Rs 6,250
• Fund B: 100 units x Rs 62.5 = Rs 6,250

Both funds deliver identical returns, irrespective of the NAV. Therefore, investors should not be swayed by the 'Rs 10 NAV' proposition of NFOs.

Besides, a scheme's performance track record, along with its risk-reward profile, is a key criterion when selecting mutual funds.

But since NFOs lack a performance history, comparing them with existing schemes and choosing the right one becomes difficult, making NFO investments relatively risky.

Further, there is no reliable historical data on portfolio characteristics such as asset allocation, market-cap bias, sector exposure, credit quality (in the case of debt funds), portfolio churn, or concentration.

This makes it hard for investors to assess risk and make informed decisions.

When investing in schemes launched by new fund houses, it's also challenging to evaluate their investment philosophy and processes.

It's noteworthy that only process-driven fund houses with a strong focus on quality and risk management tend to deliver consistent long-term performance.

That said, if you are willing to take calculated risks, you may consider investing in NFOs that offer a truly unique proposition not currently available in the market and that help diversify your portfolio.

Any such investment should align with your risk appetite, investment horizon, and financial goals.

If you are considering passively managed schemes, evaluate factors such as expense ratio, tracking error, and trading volumes (in the case of ETFs).

Additionally, ensure that the passive investment fits well within your overall strategic asset allocation.

Conclusion

As an investor, you typically do not need more than 5-10 mutual fund schemes in your portfolio, depending on your investment corpus.

These should be spread across equity, debt, hybrid, and ELSS categories.

As the saying goes, "Too much of anything is good for nothing". Beyond a point, adding more funds can lead to over-diversification, making portfolio management and review more challenging.

Instead of chasing multiple NFOs, adopt a goal-based investment approach.

This involves aligning your mutual fund investments with specific financial goals such as retirement or your children's future. Based on your risk profile and time horizon, you can invest across suitable categories and sub-categories.

Choose schemes with a strong long-term track record of delivering reasonable risk-adjusted returns and sound qualitative attributes.

Whether you invest in NFOs or existing schemes, review your portfolio periodically. Some funds may perform well in the short term, but long-term consistency is what truly determines their value.

In my view, if your existing portfolio is well diversified and capable of riding market ups and downs, it's better to stay invested rather than adding new funds aimlessly.

Happy investing.

Disclaimer: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, enlistment as IA and RA with Exchange and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.