When a new mutual fund debuts, it launches through a New Fund Offer (NFO). In this article, we delve into the essence of NFOs, providing all the essential information you need.
Discover how these offers can introduce exciting investment opportunities and enhance your portfolio.
Keep reading to explore new avenues for growth and make informed decisions in the dynamic world of mutual funds.
What is NFO?
The NFO serves as the introductory stage for a new mutual fund scheme launched by an Asset Management Company (AMC). During an NFO, the fund house invites investors to subscribe to the units of the new scheme. This initial phase, when the fund is open for investment, typically has a fixed subscription period. After this period, the NFO closes, and regular trading begins.
Deciding to Invest in a Mutual Fund NFO
Deciding whether to invest in a mutual fund via an NFO involves thorough research. Begin by evaluating the fund’s investment objectives, strategies, and the credibility of its management. Compare the NFO’s unique features and potential benefits against existing funds in the market.
Examine the market conditions and ensure the fund aligns with your long-term investment goals. Additionally, review the fund’s fee structure, risk factors, and the track record of similar funds managed by the team. A comprehensive analysis is crucial for making an informed decision.
Subscription Period for an NFO
During a New Fund Offer (NFO), a Mutual Fund invites investors to subscribe to its new scheme for a limited time, usually up to 15 days. Investors can buy units of the new fund at its face value during period. After the NFO ends, the Mutual Fund uses the funds raised to start investing, and depending on the type of scheme, may or may not continue to accept new subscriptions.
How to Invest in NFO?
Investing in NFOs is similar to investing in any other mutual fund. Investors can invest in New Fund Offers through their brokers or online through the asset management company’s website.
Here are the steps to invest in NFOs:
- Investors typically use a broker or Mutual Fund Distributor (MFD) for online NFO investments, but they can also directly approach the AMC office. The AMC will guide you through the process.
- If you are going to an authorized broker, get in touch with the broker and submit the form, cheque, and other details.
- You can also show the folio number for that AMC, and then most of your data is pulled out by the system.
- Fill up the complete offline form, verify the details, and then submit it to the broker after signing it and also attach the cheque for the NFO payment.
Based on your suggested allocation, choose the ideal fund to invest in and the appropriate investment amount. You can find some online tools to assist in the process. Lastly, you need to decide whether you wish to make a lump sum commitment or a series of smaller investments.
Exploring the Advantages of Investing in NFOs
Here are the key benefits of investing during the NFO period:
- Potential for higher returns: A key benefit of investing in the latest NFO mutual fund is the potential for higher returns compared to established mutual funds.
- Fresh investment opportunity: As per the NFO meaning in mutual funds, it offers investors a chance to invest in a newly launched mutual fund scheme from the very beginning. This allows them to participate in the potential growth of the fund from its inception.
- Profit Generating Capacity: The entry price for NFO is just Rs 10 per unit, but after their subscription period expires, the NAV price per unit mainly scales up, giving you good profits. If the NFO is open-ended, you could also sweep off the gain and exit the fund or stay invested if you want, depending on your financial goal
- Creates a Disciplined Investment Approach: NFOs that come with a fixed lock-in period may have more to gain once the fund matures. The NFO can achieve its objective as investors do not withdraw the funds before the maturity period. This offers dual benefits to you: – creates investment discipline and creates more wealth.
- NFOs are usually launched as limited-period offers and can often prove to be a very profitable investment.
- NFOs offer new and unique investment ideas or themes.
Navigating the Regulations for NFO Investments in India
SEBI has established certain regulations for new mutual funds during their New Fund Offer (NFO):
- Debt-oriented and balanced hybrid schemes must amass at least Rs. 20 crore, while other schemes require a minimum of Rs. 10 crore during NFO.
- The mutual fund company launching a new scheme must ensure that the NFO attracts investments from a minimum of 20 investors.
- To prevent investment concentration, no single investor can hold more than 25% of the scheme’s total corpus. This is known as the 20-25 rule, which is applicable to all mutual fund schemes.
- The fund house introducing a new fund must invest in the scheme. Previously, they were required to invest at least 1% of the NFO amount or Rs. 50 lakh, whichever is lower.
- Sebi has recently mandated fund houses to increase their investment based on the risk level of the scheme, though specific details are yet to be clarified. This implies that fund houses might need to invest more in Equity Funds compared to safer options like Liquid or Overnight Funds.
Contrasts Between NFO and IPO: Exploring Investment Vehicles
- An IPO is an initial offer made by the company to the public for subscription of its shares. In contrast, an NFO is the first offer of units in a mutual fund scheme just launched and presented to investors.
- IPOs typically offer separate quotas for retail investors and may provide additional discounts. However, there are no such special benefits for retail investors in the case of mutual fund NFOs.
- In an IPO, the utilization of funds is crucial, as it determines whether the IPO money will add value to investors or not. Conversely, NFOs determine the market level and establish the valuations at which the fund will invest.
- The IPO price reflects the perceived value of the company, whereas most mutual fund NFOs are offered at a price of Rs. 10.
- The IPO price is determined by the forces of demand and supply, while NFOs only have an indicative unit value.
Understanding the Risks Associated with Investing
Investing in NFOs could pose risks. Unlike existing funds, where you can readily check the asset allocation and risks involved, NFOs don’t have a performance history. Moreover, you won’t be able to assess how the fund manager intends to utilize your money.
Without any benchmarks or metrics, it will be difficult for you to predict the fund’s performance. Whether the fund emerges successfully or fails remains uncertain. Compared to existing funds, NFOs may offer limited information for analysis. Investors may need to rely on the fund’s investment strategy, disclosures, and the reputation of the AMC to make an informed decision.
Bottom Line
Investing in an NFO could potentially yield high rewards for investors, but there’s no certainty regarding substantial returns, akin to any other market-linked instrument. Before subscribing to an NFO, you must consider various critical aspects, such as the scheme’s objectives, returns generated by similar funds, etc. Happy Investing!
FAQs
Is NFO a good investment?
Investing in an NFO may offer investors exposure to a new investment theme or idea. Moreover, you must check if the relevant investment theme can do well over time. NFOs offer investors the opportunity to profit from a unique investment theme at an early stage.
How to invest in NFOs?
New fund offers can be invested in both offline and online modes. A word of caution before you contemplate investing in a fund’s NFO. However, to invest you must have completed your KYC, therefore verify your KYC status first before investing.
How do I choose the best NFO?
Begin by knowing the investment theme of the mutual fund scheme. Every NFO states in its Scheme Information Document (SID) what it aims to achieve (high returns, capital appreciation, etc) and how it aims to achieve it, you need to see how the scheme plans to allocate its assets, whether it will be an equity-oriented scheme or if it will predominantly invest in debt and money market instruments or will follow a hybrid approach.
Is NFO better than IPO?
Both NFO and IPO are similar in some aspects with their fundamentals. They both raise money from the public for further operations. IPOs, NFOs are also open for subscription for a fixed period. However, NFO is available for subscription for a much longer period than an IPO.
