In India, Systematic Investment Plans (SIPs) have revolutionized how ordinary people invest in mutual funds. By putting in small amounts regularly, investors can benefit from the discipline of investing, rupee-cost averaging, and the long-term power of compounding.
However, a worrying trend has emerged: pushing SIPs into New Fund Offers (NFOs). While NFOs may sound attractive, they often carry more risks and deliver lower returns compared to established funds.
Unfortunately, many retail investors fall into the NFO trap due to aggressive distributor marketing, catchy fund names, and the illusion of buying units at “₹10 NAV.” But beneath the gloss, SIPs in NFOs often don’t justify the hype.
This article explores the psychology, risks, and pitfalls of investing SIPs in NFOs, and why investors should be cautious before committing their hard-earned money.
What Is an NFO?
An NFO (New Fund Offer) is the launch of a new mutual fund scheme by an asset management company (AMC). It’s similar to an IPO, but instead of company shares, it’s mutual fund units.
Key points about NFOs:
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Units are offered at ₹10 per NAV during the launch.
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AMCs launch NFOs to expand product offerings and capture new investor interest.
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NFOs can be open-ended (investors can enter/exit anytime) or close-ended (lock-in for a period).
While NFOs may occasionally bring innovative products, most are simply variations of existing schemes in the market.
Why SIPs in NFOs Are Pushed Aggressively
If NFOs are not inherently better than existing funds, why are SIPs marketed so heavily in them?
1. Distributor Commissions
AMCs offer higher commissions to distributors/agents for selling NFOs compared to established funds. This creates a financial incentive to push them, regardless of investor suitability.
2. Psychological Pricing (₹10 NAV Illusion)
Investors are made to believe that buying at ₹10 is like “getting in cheap.” In reality, NAV is irrelevant—returns depend on fund performance, not unit price.
3. Fresh Narratives and Themes
NFOs are often packaged with trendy stories:
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“Digital India Fund”
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“EV & Green Energy Fund”
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“Global Tech Innovators Fund”
These themes excite investors, who believe they’re buying into the “next big thing.”
4. SIP as a Safety Mask
Agents combine NFOs with SIP pitches: “It’s a SIP, so even if markets fall, you’ll average out.” While this is true for diversified equity funds, it doesn’t reduce the structural risks of an untested fund.
5. Scarcity & Urgency
NFOs are marketed as “limited-time opportunities.” The deadline pressure pushes investors to act quickly without deep research.
The Risks of SIPs in NFOs
1. No Track Record
Unlike established funds with 5–10 years of data, NFOs have zero performance history. Investors are effectively betting blind.
2. Portfolio Duplication
Most NFOs don’t offer anything unique. They often replicate existing funds with minor tweaks, meaning investors could get the same exposure elsewhere—with proven managers and history.
3. Theme Cyclicality
Many NFOs are thematic/sectoral (digital, infra, pharma). These may perform well in short bursts but often underperform in the long run. SIPs in such NFOs suffer during sector downturns.
4. Liquidity Concerns
Close-ended NFOs lock investors for 3–5 years, restricting flexibility. Even open-ended funds may struggle with liquidity initially.
5. High Risk, Low Return Reality
While NFOs promise “new opportunities,” studies show that long-term returns from NFOs are no better—and often worse—than established peers. Investors bear higher risks with no added advantage.
The Investor Psychology Behind NFO SIPs
NFO SIPs thrive because they tap into behavioral biases:
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FOMO (Fear of Missing Out): Belief that this fund could be “the next multibagger.”
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Anchoring Bias: Fixation on ₹10 NAV as “cheap.”
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Recency Bias: Hype from recent market trends (e.g., green energy boom leads to green funds).
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Herd Mentality: Friends, colleagues, and influencers joining amplifies the urge.
These biases cloud rational analysis, making investors commit to risky SIPs without realizing the implications.
Data: NFOs vs Established Funds
Industry data from AMFI and independent analyses show:
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Over 70% of NFOs launched in the last decade have underperformed existing category leaders.
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Many thematic NFOs see strong inflows during hype cycles, only to struggle in sideways/down markets.
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Investors who stuck to consistent SIPs in diversified flexi-cap or index funds outperformed those who chased NFOs.
This proves the “high risk, low return” trap of SIPs in NFOs.
Real-World Examples
1. Infrastructure NFOs (2007–08)
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Infra funds launched during India’s infrastructure boom raised massive money.
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After the 2008 global crisis, infra stocks collapsed, wiping out years of SIP contributions.
2. Pharma/Healthcare NFOs (2015–16)
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Launched when pharma was hot.
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Regulatory issues led to a sector slump; funds underperformed diversified equity for years.
3. International Thematic NFOs (2021)
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AMCs launched global tech/EV-focused NFOs after Nasdaq surged.
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Many underperformed badly once global tech corrected in 2022.
Why Established Funds Are Better for SIPs
1. Proven Track Record
You can analyze 5–10 years of performance, fund manager style, risk ratios, and consistency.
2. Diversification
Well-established flexi-cap, large-cap, and index funds spread risk across sectors and companies.
3. Long-Term Reliability
Funds with stable management and strong history give more confidence than experimental NFOs.
4. Cost Efficiency
Some NFOs have higher expense ratios initially. Established index funds often have lower costs, translating into higher net returns.
How to Spot Genuine vs Gimmicky NFOs
While most NFOs are unnecessary, some may genuinely bring new asset classes to Indian investors (e.g., international ETFs, target-date funds).
Checklist before considering an NFO SIP:
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Does it offer exposure unavailable in existing funds?
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Is the AMC reputable with strong fund management history?
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Is the theme sustainable beyond hype cycles?
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Does it fit into your long-term portfolio strategy?
If the answer is “no” to most, avoid it.
Smarter Alternatives to NFO SIPs
Instead of chasing NFOs, investors should:
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Stick to flexi-cap or multi-cap funds for core SIPs.
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Use index funds/ETFs for low-cost diversification.
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Add sector/thematic exposure only in small portions (<10% of portfolio) after research.
This approach balances discipline with growth, avoiding unnecessary NFO risks.
Conclusion
SIPs are one of the best tools for long-term wealth creation—but SIPs in NFOs are often high risk with low return potential. Aggressive sales tactics, commission-driven pushes, and the illusion of “cheap entry at ₹10” lure retail investors into schemes that lack history, stability, and long-term value.
For most investors, the smarter path is to stick with established, diversified funds that have proven performance across cycles. NFOs should only be considered if they bring truly unique exposure aligned with long-term goals—not just because of hype or agent recommendations.
The golden rule? Don’t let FOMO or sales pitches decide your investments. SIPs work best in time-tested funds, not in untested experiments.
