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Understanding New Fund Offer (NFO)

Mutual funds are considered to be one of the most popular tools of investment for beginners. With the growing popularity of mutual funds in India in the last few years, the number of fund houses or asset management companies (AMC’s) has increased too. In short, the Indian market is flooded with different types of mutual fund schemes. Ever wondered how these schemes come into existence? The answer to this is through NFOs. If one wishes to invest in mutual funds, one must be aware of NFO. Investing in a mutual fund scheme during the NFO period could prove highly rewarding for the investor. Let us find out more.

Defining NFO

Types of Mutual Fund NFOs

NFO mutual funds are generally of two types:

Benefits of Investing in NFO

Generate Profits

Investing in a new fund offer of a mutual fund can be profitable as the units are purchased at a nominal rate. Once the units are traded in the open market, any increase in the NAV can substantially benefit the investors. 

Invest in Innovative Funds

Many AMCs are now launching innovative mutual fund schemes. For instance, some schemes specifically invest in recently-listed stocks and IPOs. And some schemes use hedging strategies to generate better returns for the investors. With NFO, one gets to invest in such funds before it is open to every investor.

Lock-In Period for Disciplined Investing

A lot of people invest in mutual fund schemes only to redeem them after a few months. This negatively impacts the investment goals. But with NFOs, like close-ended NFOs, there is a lock-in period for which one must remain invested. This makes investment more disciplined and also increases the returns potential.

Things to Consider Before Investing in NFO

Reputation of the Fund House 

Before investing in a new fund offer, ensure to conduct a background check of the investment firm managing the scheme. Look for a fund house with at least 5 to 10 years of experience in the mutual fund industry and assess its performance track record over that period. If unsatisfied, opt not to invest in the NFO of that particular fund house and consider an NFO from a reputed fund house instead.

Objectives of the Fund

The investment objectives of the fund provide information about asset allocation, associated risk factors, liquidity, expected returns, etc. In essence, they give insight into where the fund manager plans to invest one’s money. Assessing the fund’s objective helps determine if the NFO offers promising potential for optimal returns on investment.

Theme of the New Fund Offer

The mutual fund arena boasts around 1479 schemes (as of February 2022), so consider investing in an NFO only if it offers something unique. Thoroughly read the scheme information documents to grasp the fund’s theme. It might be wise to invest in similar funds with a visible performance track record.

Risks 

Investments in NFOs may be a risky affair as it is not possible to assess where one’s money will be invested, like in an existing fund where one can check for asset allocation. This is because, in an NFO, allocation of funds cannot be done until the entire money is collected. NFOs also do not have a performance history and hence, one’s will not be able to ascertain how the fund is going to perform.

Returns 

NFOs do involve a certain risk, but that doesn’t imply investing in them is entirely unfavourable. Some NFOs can yield excellent returns, contributing to wealth creation. Analysing the return aspect of the NFO is advisable if genuinely interested. However, for those already invested, reviewing the investment quarterly for the initial 3 years is recommended. This practice helps assess the fund’s performance, enabling investors to redeem units if necessary and explore alternative investments.

Investment Horizon 

Before deciding to invest in an NFO, consider the investment horizon and objectives. Some NFOs may have a lock-in period, during which one cannot redeem units. An exit load may also apply on redemption, so it’s advisable not to invest if one’s horizon doesn’t align with the schemes.

Cost 

Another factor that one needs to consider before investing in an NFO is the expense ratio. Opt for the NFO if it offers a lower expense ratio than an existing fund having the same investment objectives. Also, check for the exit load charged by the NFO so that one does not lose a huge amount if, for some reason, one wishes to withdraw from the scheme before the maturity date.

Difference between an NFO and IPO

Both IPOs and NFOs are launched to raise capital from the public but the difference between them is that IPOs concern equities of firms while NFOs concern units of a mutual fund scheme. The other differences between NFOs and IPOs are given below:

Investing in a New Fund Offer

Investing in mutual funds can be made hassle-free with Share India. Connect with a Share India RM today to get more details.

Conclusion

NFO presents investors with an opportunity to subscribe to units of a mutual fund scheme at a fixed price, typically ₹10 per unit. Investors often view NFOs as a chance to capitalise on low unit prices and anticipate significant gains. Additionally, NFOs are perceived as a value-for-investment proposition by some, while fund houses utilise them to achieve their AUM objectives. Understanding the dynamics of NFOs equips investors to make informed decisions aligning with their investment goals and risk appetite.

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