A New Fund Offer (NFO) is an initial public offering launched by an asset management company (AMC) to introduce a new mutual fund to the market. During this subscription period, typically lasting 10-15 days, investors can purchase units of the fund at a predetermined price, usually Rs. 10 per unit. After the NFO closes, the fund is listed on the stock market and its value fluctuates based on its net asset value (NAV). Investing in NFOs offers investors the potential to capitalise on a fund's growth from its earliest stages, making them an attractive option for those seeking long-term returns.
In this article, readers are going to learn about NFO meaning, NFO types, how NFO works and many more in detail.
What is NFO?
A New Fund Offer (NFO) is an initial public offering for a mutual fund scheme. During an NFO, investors have the opportunity to purchase units of a newly launched fund at its Net Asset Value (NAV). This provides early access to the fund's potential growth.
Mutual fund houses utilise NFOs to accumulate capital for investing in stocks or debt instruments. Subscription periods typically range from ten to fifteen days, and units are typically issued at a NAV of Rs. 10 per unit on a first-come, first-served basis. In 2024, a significant number of new mutual funds demonstrated impressive performance, with some achieving returns of up to 27%. Sectoral and thematic funds, in particular, exhibited strong returns. Canara Robeco Manufacturing Fund and Motilal Oswal Large Cap Fund led the pack with returns of approximately 26.90% and 26.70% respectively since their inception.
How NFO works?
New Fund Offers (NFOs) represent the initial launch phase of a new mutual fund scheme by a mutual fund house or Asset Management Company (AMC). During this limited subscription period, typically spanning 15 days, investors have the opportunity to invest in the fund by purchasing units. Post-closure, the fund remains closed to further investments until the allotment of units to subscribers takes place. It's important to note that this dynamic applies specifically to closed-ended funds. Open-ended schemes, on the other hand, continue to accept new investments following the allotment date.
This distinction underscores a key characteristic of NFOs. Their temporary availability window presents a unique opportunity for investors to potentially capitalize on the fund's growth potential from its inception. However, it's essential to exercise due diligence and carefully consider factors such as the fund's investment objectives, underlying assets, risk profile, and the AMC's track record before making an investment decision.
Who launches NFOs?
New Fund Offers (NFOs) are launched by Asset Management Companies (AMCs) to introduce new mutual fund schemes. AMCs design and manage these funds, offering investors an opportunity to invest in the initial phase. NFOs typically come with a fixed subscription period, after which they open for regular investment.
Benefits of investing in NFOs
Some benefits of investing in NFOs include:
Investment in new strategies
NFOs launch fresh mutual fund schemes, offering investors the chance to invest right from the beginning. This can be attractive for those who want to start with a clean slate and witness the fund's journey from inception.
Expense ratio
During the New Fund Offer (NFO) phase, any costs accrued may not be levied against the scheme. However, once the scheme is introduced, expenses and an expense ratio will come into effect.
Low entry barrier
NFO units are typically priced at a fixed rate, often at Rs. 10 per unit. This makes them accessible to investors with modest budgets, allowing them to start with a relatively low initial investment.'
Opportunity for better returns
If the NFO is managed effectively and its investment strategy aligns with your financial goals, you could benefit from the fund's performance as it grows over time.
Novel investment themes
Certain NFOs introduce innovative or specialized investment themes or strategies, offering investors an opportunity to diversify their portfolios uniquely.
Potential for future growth
Effective management and alignment of the NFO's investment strategy with your financial objectives may lead to potential gains as the fund grows over time.
Expert management
NFOs are overseen by seasoned fund managers who make investment choices based on the fund's objectives and prevailing market conditions, potentially increasing the likelihood of attaining your investment targets..
Different types of NFOs
NFOs can be classified into three main types based on the structure and features of the mutual fund schemes:
Open-ended funds:
Open-ended NFOs allow you to invest in mutual fund units even after the initial offer period has closed. You can enter and exit these schemes at your convenience. After the offer period, you can buy open-ended fund units at the current NAV on any business day.
Closed-ended funds:
You can invest during the NFO period only. These schemes are issued for a fixed tenure. Once the NFO period is over, further investments in the fund are not allowed. Units held in Demat can be sold in secondary market after the funds get listed on the stock exchange. As per SEBI rules, all closed-end funds must be listed on the exchange.
Interval funds:
Interval funds represent the characteristics of both open-ended funds and closed-ended funds. These funds fall under the category of closed-ended funds, but they allow you to make purchases and redemptions through the AMC window at regular intervals. These intervals may occur annually or semi-annually, allowing investors to transact within specific timeframes.
Who should invest in NFOs?
NFOs are suitable for investors who have a long-term investment horizon and are willing to take risks associated with new schemes. It’s important to note that investors should read all scheme-related documents carefully before investing.
NFO – Important rules
SEBI regulations mandate specific accumulation requirements for New Fund Offers (NFOs):
- Debt-oriented and balanced hybrid schemes must amass a minimum subscription of Rs. 20 Crore during NFO, while other schemes require at least Rs. 10 Crore.
- NFO collections should involve a minimum of 20 investors to ensure broad participation.
- The 20-25 rule stipulates that no individual investor can hold more than 25% of the scheme's corpus, preventing concentration of investment.
- Fund houses launching NFOs must invest in the scheme, with SEBI now urging increased investment based on scheme risk levels.
- Although SEBI has directed greater skin-in-the-game involvement, implementation specifics remain pending clarification, potentially impacting fund allocation across different schemes.
How can you invest in NFO?
1. Introduction to NFO investments
Investing in a New Fund Offer (NFO) provides an opportunity to invest in a new mutual fund scheme during its initial launch period. This can be done through multiple channels, making the process accessible and convenient for investors.
2. Online investment platforms
One of the easiest ways to invest in an NFO is through online investment platforms such as Bajaj Finserv platform. These platforms provide a user-friendly interface, allowing investors to browse, select, and apply for NFOs with ease.
3. Brokers
Traditional brokers also facilitate investments in NFOs. Investors can approach their brokers, who will guide them through the process, ensuring all necessary steps are completed for a successful application.
4. Fund houses
Fund houses, both online and offline, offer direct access to NFO investments. Investors can visit these fund houses' offices or websites to initiate the investment process.
5. Direct application via fund house websites
Directly visiting the fund house website is another straightforward method. Here, investors can undergo the Know Your Customer (KYC) process, which is mandatory for all mutual fund investments in India. This step verifies the investor's identity and ensures compliance with regulatory requirements.
6. Selecting units and payment options
Once the KYC process is complete, investors can apply for the NFO by selecting the desired number of units and choosing their preferred payment method. This can typically be done online, making the process swift and efficient..
7. Post-application and unit credits
After submitting the application, the fund house processes the request. Successful NFOs usually result in the crediting of mutual fund units to the investor's account within five days. This seamless process is facilitated by the fund house, ensuring a smooth transition from application to investment.
What happens after NFO closes?
After the closure of the NFO period for a new scheme, the mutual fund company typically dispenses the units within five days. In cases where allotment is not granted due to incomplete KYC norms or errors in application forms, the fund house promptly refunds the application money. Nonetheless, for open-ended mutual fund schemes, investors can continue purchasing units even after the NFO period, as these schemes remain accessible for entry or exit at any time. However, not all mutual fund schemes offer this flexibility.
Close-ended funds, for instance, limit unit purchases solely to the NFO period, as they do not permit entry or exit at any other time, thereby restricting investment opportunities to the NFO duration.
NFO disadvantages
Here are some of the disadvantages of investing in NFOs:
- Lack of track record: New Fund Offers (NFOs) lack a performance history, making it challenging for investors to assess the fund house's expertise and the effectiveness of its investing strategy.
- Nav stability: Unlike stocks, mutual funds' Net Asset Value (NAV) is not influenced by demand and supply, which can affect the attractiveness of NFOs for investors seeking immediate gains.
- Limited special benefits: NFOs typically do not offer any special benefits or advantages during the initial period, further reducing their appeal to potential investors compared to established funds.
Is NFO a good opportunity?
1. Understanding NFOs
A New Fund Offer (NFO) is the first-time subscription offering for a new mutual fund scheme launched by an asset management company. It is similar to an Initial Public Offering (IPO) in the stock market, providing an opportunity for investors to enter at the ground level.
2. Potential for growth
Investing in an NFO can be a good opportunity for those seeking to capitalise on the potential growth of a new fund. These funds are often launched with innovative strategies and may tap into emerging market trends, which can result in substantial returns over time.
3. Diversification benefits
NFOs can offer diversification benefits by introducing new themes or sectors that may not be available in existing funds. This allows investors to broaden their investment portfolio and reduce risk through exposure to different asset classes or investment strategies.
4. Pricing advantage
During the NFO period, units are usually offered at a nominal price, typically ₹10 per unit. This can be advantageous for investors as it provides an entry point at a low cost, potentially yielding higher returns as the fund grows.
5. Considerations and risks
While NFOs present attractive opportunities, it is crucial to evaluate the fund's objectives, strategies, and the track record of the fund managers. As with any investment, there are risks involved, and it is advisable to conduct thorough research or consult a financial advisor before investing.
NFOs versus Existing Funds
Many investors mistakenly believe that an NFO priced at Rs. 10 per unit is cheaper than the NAVs of existing mutual funds. This misconception arises because the Rs. 10 price in an NFO is a notional value set to raise funds, whereas the NAV of an existing fund reflects its market performance and the value of its underlying assets.
When deciding between an NFO and an existing fund, consider the following:
- Lack of Track Record: Existing funds come with a proven performance history, detailed portfolio insights, and a record of the fund manager’s decisions. NFOs lack this data, making it harder to assess their potential.
- Higher Expenses: NFOs often incur costs for promotion and distribution, which are passed on to investors. Existing funds do not have these initial expenses, making them relatively cost-efficient.
- Portfolio Transparency: Existing funds have well-established portfolios that allow for thorough analysis of their holdings and historical changes. NFOs typically only outline their objectives, with actual portfolios formed later, leaving investors to rely on projections rather than data.
While past performance is not a guarantee of future returns, it offers valuable insights into an existing fund's investment philosophy, a benefit not available with NFOs.
Things to keep in mind before investing in NFO
Reputation of the AMC
It is important to research the reputation of the Asset Management Company (AMC) before investing in their NFO scheme. A good reputation indicates that the AMC has a history of managing funds well and can be trusted with your investment.
Minimum Investment and exit load
The minimum investment required for an NFO scheme usually ranges between Rs. 500 to Rs. 5000. It is important to consider this amount and ensure that you have sufficient funds to invest in the NFO scheme. The Exit load should also be considered before investing in an NFO.
Nature of Instrument
The nature of the instrument should be considered before investing in an NFO scheme. The instrument should be aligned with your investment goals and risk appetite.
Objective of the Fund
The objective of the fund should be considered before investing in an NFO scheme. The objective should be aligned with your investment goals and risk appetite.
Features, Investment Objectives, and Underlying Investment Strategies of NFO Schemes
It is important to read the offer document carefully and understand the features, investment objectives, and underlying investment strategies of NFO schemes before investing.
How to start an SIP in a mutual fund launched via NFO?
The process of starting an SIP (Systematic Investment Plan) in a mutual fund launched via an NFO (New Fund Offer) is straightforward but essential to understand. After the NFO period concludes and the fund is available for regular investment, you can initiate an SIP to invest systematically over time. This approach helps in averaging costs and minimizing the effects of market volatility. To simplify your investment planning, use our SIP return calculator. This tool helps estimate potential returns based on your monthly investment, enabling you to make informed decisions about starting SIPs in newly launched mutual fund schemes.
Key takeaways
Introduction: A New Fund Offer (NFO) allows investors to buy units of a mutual fund at an initial price during its launch by Asset Management Companies (AMCs).
Investment Opportunity: NFOs provide a chance to invest in innovative strategies, capitalising on emerging market trends.
Types: NFOs are classified into open-ended, closed-ended, and interval funds, each offering different investment and redemption terms.
Benefits: They offer low entry barriers, potential for better returns, and access to novel investment themes.
Disadvantages: NFOs lack a performance track record, making it harder for investors to evaluate their potential success.
Investment Channels: NFOs can be accessed through online platforms, brokers, or directly via fund houses.
SEBI Rules: NFOs must comply with SEBI regulations, including a minimum subscription amount and a 20-25% ownership rule to prevent concentration of investment.
Conclusion
In conclusion, NFOs provide investors with an opportunity to invest in new and innovative strategies that existing open-ended funds may not offer. However, it’s important to note that investing in NFOs comes with its own set of risks and rewards. Investors should read all scheme-related documents carefully before investing.
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