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OLM Desk - 01 December 2022

Investment Through NFO Carries More Risk Than SIPs

Lalit Jha

What is the benefit of investing in mutual funds through new fund offerings (NFOs)? Do they provide any advantage over systematic investment plans (SIPs)?

When you are investing in a mutual fund through an NFO, it is important to be aware about the risks, as there is no history of past performance, unlike in the case of existing mutual funds. That makes them extremely risky, because they might perform or absolutely fail. There is no comparison between opening an SIP in existing mutual fund and investing through an NFO.

Here are some points you should keep in mind before investing in NFOs.

  • Check if it’s open-ended or closed-end. Check if it has any lock-in period or not.
  • Check the type of securities the mutual fund will purchase through this NFO. What is the objective of the fund?
  • Expenses will be deducted from the net asset value (NAV). So, the cost of investing could be higher.
  • Typically, there won’t be any entry load, but there might be some exit load on early exit.
  • Check the reputation of the asset management company, based on the performance of its other funds.
  • Check for scheme-related documents before investing. These highlight the main objectives of the fund, asset allocation, investment strategy, benchmark index, level of risk, liquidity, fund management team, minimum subscription, investment amount in SIP or lump sum, and other relevant information.
  • Check the risk profile of the fund. This is available in the form of a risk-o-meter in the offer documents. This will give you an idea about the risk parameter of the fund.
  • Check your risk profile, investment horizon and your goal and whether the fund is in line with your goal.

Hina Shah CFPCM, Financial Coach, LUHEM

Aparna Dixit

Does the National Pension System (NPS) provide a higher rate of return than Public Provident Fund (PPF)?

PPF is among the safest fixed-income investment options that is fully secured with a government guarantee. The interest rate is usually changed every quarter. Historically, the interest rates have been in the range of 7.1-8.8 per cent. At present, it is 7.1 per cent.

NPS, on the other hand, is a market-linked voluntary contribution retirement scheme. There are three main investment components in NPS—equity, government securities (G-Secs), and corporate bonds. You can decide the allocation to each of these with an upper cap to provide greater exposure to equity depending on your age. The equity component in the long term (over a 10-year horizon) is expected (not guaranteed) to give inflation-beating and double-digit returns. G-secs and corporate bonds can give similar or higher returns compared to PPF. So, NPS is expected to give better returns in the longer run compared to PPF.

Uma S. Chander, CFP CM, Handholding Financials

Kamaldeep Singh

How are corporate bonds different from debt mutual funds and government bonds? Which is a better debt investment?

Corporate bond funds primarily invest in corporate bonds and offer a higher yield relative to a government bond due to the higher risk of insolvency. A bond with a high credit rating will pay a lower interest because the credit quality indicates the lower default risk of the business.

Debt mutual funds may be a better option to reduce the risk of investing in corporate bonds, as they offer greater diversification. There are also G-sec funds and other sub types of debt mutual funds.

You should consider a few factors before investing in corporate or government bonds, such as when would you need your investible surplus and how much risk you are willing to take, as each category of bonds have different levels of risk and returns attached to it.

If you are looking at minimum risk, then go for government bonds, but the holding tenure will be longer. But if you are willing to take higher risk, then you may consider investing in corporate bonds.

Consult a financial planner for proper advice.

Suhel Chander, CFPCM, Handholding Financial

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