A New Fund Offer or NFO is the introductory offer made by an asset management company (AMC) when it launches a new mutual fund scheme. It is through such offers that fund houses raise the initial capital required to purchase financial instruments such as stocks, bonds, etc.
If you are interested to invest in NFOs, learn what are NFOs, how they work, their types, benefits and risk factors, read on!
Post-launch, NFOs are open for subscription for a limited period. During this timeframe, individuals can invest in the mutual fund scheme at the offer price. As per regulations of the Securities and Exchange Board of India (SEBI), NFOs can remain active for not more than 15 days. Moreover, in general, the offer price of a new fund offer is fixed at Rs. 10 for each unit.
Once an NFO mutual fund closes, existing as well as new investors have to buy units of the scheme as per the applicable net asset value (NAV).
Here are the different types of NFO funds:
As the name suggests, open-ended funds are always open for investment and redemption. In other words, once the NFO period is complete, you can enter or exit the scheme anytime you like.
In the case of close-ended mutual fund schemes, you will not be able to enter or exit the scheme even after the NFO mutual fund period is over. You can redeem the units post completion of the maturity period, which usually ranges from three to five years.
As per SEBI regulations, a New Fund Offering can remain active in the market for a minimum period of 30 days. The offer price to subscribe to the NFO is Rs.10. The collected revenue can be utilised in procuring securities of various publicly traded companies that are listed on a stock exchange.
Now that you understand the NFO meaning and are aware of its different types, it’s imperative to know the benefits of investing in them. So, here are some advantages of subscribing to NFOs:
As mentioned above, the price of each unit of an NFO mutual fund is usually Rs. 10. It is likely that the NAV increases post-completion of the NFO period. Thus, investors can benefit if there’s a significant difference between the net asset value and the NFO price of the fund.
Many individuals invest in mutual fund schemes; however, they end up redeeming their units within a few years. Then, they are not able to achieve their investment objectives. However, close-ended NFOs make individuals much more disciplined at investing as one has to remain invested in a scheme for a specific period owing to the lock-in period.
Thus, investors have a higher chance of fulfilling their financial goals. However, there’s also the factor of flexibility when it comes to NFOs. If investors want to avoid lock-in periods, they can opt to invest in an open-ended new fund offer.
Asset management companies are launching various innovative schemes these days that involve the use of new hedging strategies to maximise portfolio value. By subscribing to NFOs, you can get the chance to enter such schemes before they open to all investors.
It is possible to invest in new fund offerings both online and offline. You need to have completed your KYC, failure to which the application will get rejected.
An offline mode is wherein you fill up the physical form, and sign with your folio number / other details after verifying your KYC status.
An online mode is wherein you fill up the NFO application online. You can verify KYC status and then proceed to invest online.
Unlike existing mutual fund schemes, new fund offers do not have a performance history. It could become difficult for investors to estimate future returns owing to the unavailability of past returns and other key metrics. On account of the uncertainty, NFO funds can be risky. That said, if investors are looking to subscribe to any of the ongoing or upcoming mutual fund NFOs, they must consider certain crucial aspects, some of which have been explained below…
Most investors look for investment opportunities when the market reaches a particular height. Whether it is gold or real estate, they desire to enter the market, expecting it to rise further. They prefer investments that are available at a cheaper rate. The AMCs price the NFO at a discount to attract investors, and investors see this as a buying opportunity and as a value for money subscription to it.
Here are some vital aspects investors need to take into account before subscribing to NFO mutual funds:
Investors must refer to the offer document that an asset management company files with the SEBI. It consists of all key details related to the upcoming mutual fund scheme. From here, investors can get to know the nature of the underlying financial instruments.
Individuals can also find the objectives of the fund in the offer document. It gives an idea regarding vital details, such as asset allocation, estimated returns, liquidity and more.
Individuals should also look into the credibility of an asset management company before deciding whether to subscribe to any of its NFOs. Also, investors must ensure to check the backgrounds of the fund managers, especially in the case of actively-managed mutual fund schemes.
Investors have to pay a minimum subscription amount to invest in a new fund offer as per the terms and conditions. This is one of the most vital factors to consider when deciding whether to invest in NFO mutual funds or not.
While NFOs can be highly rewarding for investors, there’s no certainty whether they’ll deliver substantial returns, just like any other market-linked instrument. It is, thus, imperative that you consider various important aspects, such as the scheme’s objectives, returns generated by similar funds, etc. before subscribing to an NFO. To start investing, visit the Navi Mutual Fund.
*Disclaimer: Mutual funds are subject to market risks. Please read the offer document carefully before investing.
Ans: The minimum subscription amount of an NFO usually ranges from Rs.500 to Rs.5,000. Post completion of the KYC process, individuals can invest an amount that is equivalent to or more than this amount.
Ans: Investing in NFOs could be risky. NFOs don’t have a performance history where one can check the asset allocation and risks involved.
Ans: Once the NFO period of a new scheme closes, the mutual fund company allots the units of the new scheme within five days. If you don’t get an allotment due to mistakes in application forms or incomplete KYC, the fund house refunds the application money
Ans: Once the NFO closes, the asset management company allots units of its new mutual fund scheme within a period of five days. Do note, that if you do not get an allotment, it might be because of errors in the application or unsuccessful KYC verification.
Ans: SEBI’s regulations do not allow asset management companies to go overboard when it comes to NFOs. Fund houses cannot have more than one mutual fund scheme in each category.
Before you go…
Disclaimer- Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.