What is New Fund Offer (NFO) – Its Working, Benefits and How to Invest
A New Fund Offer (NFO) is a first time offer that an Asset Management Company (AMC) issues when launching a new mutual fund scheme. This works in a similar way to the Initial Public Offer for stocks. An NFO is launched to collect funds from the public who can purchase mutual fund units at an introductory price.
Keep reading further to know about its benefits and how you can invest in one!
What is a New Fund Offer?
A New Fund Offer or NFO is an introductory mutual fund unit sale that is offered by an Asset Management Company (AMC) when it introduces a new scheme. It allows the company to raise money from interested investors and re-invest it in different types of assets. As per the guidelines issued by Securities and Exchange Board of India (SEBI), AMCs are not allowed to issue NFO on identical items.
How Do New Fund Offers (NFOs) Work?
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).
Types of New Fund Offerings (NFOs)
Here are the different types of NFO funds:
1. Open-ended 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.
2. Close-ended Funds
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.
3. Exchange-Traded Fund (ETF)
AMCs also introduce exchange-traded funds through NFO. It is a type of mutual fund whose units can be openly traded on the stock market. These funds can invest in multiple types of securities, such as equity and bonds, and are considered to be highly liquid.
Benefits of Investing in an NFO
Here are some of the benefits of investing in an NFO of a mutual fund scheme:
1. Flexibility
NFOs offer flexibility in the terms of timing for both the AMC and the investor. Most close-ended funds come with this advantage. If the timing is not ideal for the investor but the market is in its ultimate condition, the manager can hold a part of the investor’s fund to invest later.
2. Expense Ratio
The NFO of a mutual fund scheme comes with a lower expense ratio as it is still relatively new to the market. Hence, it will cost you an overall lower expense ratio than other funds.
3. New Asset Classes
NFO introduces to you new themes or asset classes that may have great growth potential. Also, it will diversify your portfolio. If you find that the theme of the mutual fund is aligned with your investment objective, you might invest early to profit well over time.
How to Invest in a New Fund Offer?
There are two ways to invest in a New Fund Offer.
1. Broker
This is the most straightforward way of investing in an NFO. You can approach and take assistance from an authorised broker who will help you complete the necessary formalities to invest in an NFO.
2. Online Trading Account
This is another way of investing in an NFO which is primarily suitable for experienced investors. If you are already an investor, you must have an online demat account. You can subscribe to the NFO through that account by yourself.
Why is NFO a Good Investment Option?
The primary reason why NFO is a good investment option is that it costs less than most existing funds in the market. It is an introductory offer of a newly launched mutual fund scheme; hence, the expense ratio is bound to be low.
Also, NFO investments help to diversify your portfolio. With no past track record, investing in a new mutual fund scheme might prove to be profitable for you. With proper industry research, you can assess whether investing in a particular NFO might be a good option for you.
Differences Between NFO and IPO
- First and foremost, an IPO is an initial offer made by the company to the public for a subscription of its shares. While an NFO is the first offer of units in a mutual fund scheme just launched and shown to the investors.
- IPOs have separate quotas for retail investors and even offer additional discounts. However, there are no such special benefits to retail investors in the case of mutual fund NFOs.
- In an IPO, the usage of funds is very important as that will determine whether the IPO money will add value to the investor or not. NFOs decide the level of the market and will determine at what valuations the fund will invest.
- The IPO price is indicative of the perceived value of the company. When it comes to NFOs, most of the fund NFOs come out at a price of Rs.10.
- An IPO can list at a premium to the issue price or at a discount depending on the demand, market conditions and news flows. However, NFOs normally open with a discounted NAV.
- The IPO price is determined by forces of demand-supply while NFO only has an indicative unit value.
Things to Keep in Mind While Investing in NFOs
Here are some vital aspects investors need to take into account before subscribing to NFO mutual funds:
1. Nature of Financial Instruments
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.
2. Fund Objective
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.
3. Fund House Reputation
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.
4. Investment Cost
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.
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Final Word
Investing in an NFO could be highly rewarding for investors, but there’s no certainty whether they’ll deliver substantial returns, just like any other market-linked instrument. You must consider various important aspects, such as the scheme’s objectives, returns generated by similar funds, etc. before subscribing to an NFO.
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*Disclaimer: Mutual funds are subject to market risks. Please read the offer document carefully before investing.
FAQs
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.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
