NFO vs SIP

The NFO vs. SIP debate is a common one that has perplexed several investors. While an NFO is a novel fund offering from an AMC, an SIP is a convenient and disciplined mode of mutual fund investment. In a head-to-head NFO vs. SIP comparison, NFOs emerge as riskier investments due to the lack of a proven track record, while SIPs in existing schemes are considered more stable and relatively low-risk investments. However, NFOs can also offer niche opportunities to invest in emerging sectors at a low initial cost of Rs. 10/unit. Therefore, understanding the differences between NFO and SIP becomes paramount for investors seeking to pick between the two.

In this blog, we cover the NFO vs. SIP debate in detail, starting with the meaning of NFO and SIP.

What is an NFO?

An NFO or new fund offer is the first subscription offering in a new mutual fund scheme. When an asset management company (AMC) launches a new MF scheme, it initiates an NFO. In simple words, NFO is a first-time subscription offer for a new scheme where investors can invest in a freshly launched scheme early and reap investment benefits. Similar to IPOs, NFOs are intended to raise capital from investors and invest the pooled funds into various securities like stocks and bonds.

NFOs have a fixed investment window, generally ranging from 10 to 15 days. During this time, investors can purchase units of the fund at an NAV of Rs. 10/per unit. Units are allotted on a first-come-first-serve basis. NFOs can fall under two categories: Open-ended and closed-ended NFOs. Open-ended NFOs allow you to enter and exit the scheme at any time, while closed-ended ones come with a mandatory lock-in period when no withdrawals are permitted. Open-ended NFOs also permit SIP investments, but generally only after the offer period ends.

What is an SIP?

Next on the NFO vs. SIP comparison, we highlight the meaning of SIP. An SIP or systematic investment plan is a method of investing in mutual funds where you contribute a fixed sum of money to a mutual fund scheme at regular intervals. With mutual fund SIPs, you invest small amounts over time rather than investing a lump-sum amount at once. Depending on your goal and budget, you can choose a suitable investment amount and time interval (monthly, quarterly, or bi-annually). The standing instructions for your linked bank account allow the sum to be auto-debited from the account on the set date.

For most mutual fund schemes, the minimum SIP amount starts from Rs. 500 onwards, making MFs easily accessible investment options for both small and big investors. MF units are allotted based on the money invested and the fund’s NAV on that particular day.

Difference between NFO and SIP

Now that you know the meaning of NFO and SIP, the differences between the two must be clear. For better clarity, we have compiled a comprehensive NFO vs. SIP comparison table below:

Parameter	NFO	SIP
Meaning	NFO is a first-time subscription offer for a new mutual fund scheme.	SIP is a convenient method of contributing a fixed sum of money at regular intervals into a mutual fund scheme.
Purpose	A new fund is launched to raise capital from investors to invest the pooled funds in various securities and earn returns.	An SIP is a method of investing in a mutual fund scheme.
Investment amount	NFOs generally require a one-time investment. However, investors can apply for SIPs in open-ended NFOs once they reopen.	The minimum investment amount varies from scheme to scheme but generally ranges from Rs. 100 to Rs. 500.
Allotment process	NFO units are allotted on a first-come-first-serve basis.	SIP units are allotted on the basis of the investment amount and the prevailing NAV on the day of purchase.
Price	Fund units are offered at a face value of Rs. 10/unit.	Units are priced according to the prevailing NAV or net asset value of the fund on the SIP date.
Duration	The initial offering period is fixed and generally varies from 10-15 days. The fund reopens for trading at a later date.	SIPs do not have a fixed investment duration when the units are open for purchase.
Risk quotient	NFOs tend to be riskier investments than SIPs.	SIPs are generally low-risk since market volatility is averaged out in the long run.
Lock-in period	Close-ended NFOs (ELSS funds) come with a fixed lock-in period, permitting no premature withdrawals.	No lock-in periods except for ELSS funds.
Performance track record	No performance track record since the fund has no past history.	SIPs in existing funds have a track record of performance, NAV fluctuations, and returns.
Benefits	Opportunity to invest in a promising scheme at a low NAV.	Opportunity to benefit from rupee-cost averaging and long-term wealth accumulation.
Ideal for	High-risk, long-term investors seeking to invest in new schemes and sectors with strong growth potential.	Investors seeking to build a long-term wealth corpus with regular contributions over time.

The above table outlines the key differences between NFO and SIPs, helping investors make a prudent choice.

NFO vs. SIP: Which is better for you?

The NFO vs. SIP debate baffles several investors, especially beginners. The choice between NFO and SIP is entirely based on your financial goals, risk tolerance capacity, and investment strategy. Investing in an NFO may be attractive to you if you wish to invest in emerging sectors or trends at a low nominal cost. NFOs are offered at a face value of Rs. 10 per unit, while the current NAV of existing funds in the sector may be much higher. Investing in the sector or theme through an NFO allows you to access a good deal on the investment.

However, investing through NFOs also carries a high risk exposure since the fund has no performance track record. The performance of the fund entirely depends on the fund manager’s strategy and market conditions post-launch. You need to evaluate the performance of other funds launched by the fund house to evaluate the prospects of the NFO. Even then, the performance of the NFO is not guaranteed. Given the high risk quotient of NFOs, such investments are best-suited for seasoned investors with a high risk appetite. If you are a beginner, you can consider avoiding NFO investments.

SIPs, on the other hand, offer a much more systematic and disciplined investment approach. Here, you can invest small fixed amounts at regular intervals to benefit from the power of compounding. The general risk of an SIP is directly linked to the type of fund you’re investing in. For instance, equity SIPs carry higher risks as compared to debt fund SIPs. However, the rupee-cost averaging effect helps average out short-term volatility over a long investment horizon, making SIPs less risky and better-suited for investors seeking long-term wealth accumulation.

Moreover, you can compare mutual funds and their past performance before making SIP investments to further lower the risk quotient of your investment. SIPs are also highly flexible, allowing you to start, stop, and adjust contributions as and when needed. Therefore, if you are a low-to-medium-risk investor looking to build a sizable wealth corpus over time with regular contributions instead of timing the market, SIPs may be the perfect investment mode for you. Instead of risking your capital with NFO investments, you can start SIPs in existing schemes with a proven track record.

Conclusion

The NFO vs. SIP debate highlights some critical factors. Firstly, NFO is a new fund offering from an AMC, while SIP is a method of investment. NFOs carry high investment risks as the fund does not have a historical track record, which can be used to evaluate its performance. SIP is a convenient and flexible method of investing in mutual funds with piecemeal and regular contributions.

As an investor, you don’t always have to choose between the two. If a reputed fund house with a strong performance history comes up with an NFO that invests in an emerging sector, you can invest in the same through the SIP route (provided the NFO is open-ended). Ultimately, the choice between an NFO and SIP depends on your investment goals, approach, risk tolerance, and investment horizon.

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