What is NFO in Mutual Funds?

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  • 15 Jul 2023

New opportunities emerge like uncharted paths in the ever-changing finance landscape, beckoning investors to embark on a growth journey. One such intriguing avenue is the New Fund Offer (NFO) in mutual funds. So, what are they and their key features? Let’s find out.

NFO refers to the launch of a new mutual fund scheme by an AMC. It allows you to invest in a fund during its initial phase, similar to an initial public offering (IPO) for stocks. NFOs can include many fund types, including equity, debt, hybrid, or sector-specific funds.

Purpose of NFO

Launching an NFO primarily aims to gather capital from investors and build a corpus for the newly introduced mutual fund scheme. The fund manager then invests the collected funds according to the investment objective and strategy outlined in the scheme's offer document.

  1. Subscription Period: NFOs have a defined subscription period during which you can purchase units of the fund. The subscription period typically lasts a few weeks, giving investors enough time to evaluate the fund and make informed decisions.

  2. Price per Unit: NFO units are usually offered at a fixed price, often called the net asset value (NAV), which is commonly set at Rs. 10 per unit. Investors can buy units at this predetermined price during the subscription period.

  3. Minimum Investment: NFOs usually have a minimum investment requirement, which can vary from scheme to scheme. Investors must meet this criterion to participate in the NFO.

  4. No Track Record: Unlike existing mutual fund schemes, NFOs lack a track record since they are newly introduced. Therefore, you cannot rely on past performance while evaluating an NFO. Instead, you must focus on other factors, such as the investment objective, fund manager's expertise, and the asset allocation strategy.

  5. Unique Investment Opportunities: NFOs often bring unique investment opportunities to the market. They may introduce specialized funds targeting a specific sector, theme, or investment strategy not readily available in existing funds. These offerings can attract investors looking for exposure to specific market areas.

  1. Open-ended: An open-ended mutual fund permits investors to enter or exit at any time. You can invest in this fund through three methods: subscribing with a lump sum during the NFO period, investing a lump sum after the NFO period, or utilizing the Systematic Investment Plan (SIP) approach. However, certain equity and debt mutual funds impose an exit load on withdrawals made before one, two, or three years from the investment date.

  2. Close-ended: The name itself implies that a close-ended mutual fund scheme restricts premature withdrawals. These funds generally do not facilitate SIP investments, except in the case of Equity Linked Savings Scheme (ELSS), which appeals to investors seeking tax benefits of up to Rs 1.5 lakh under Section 80C. Close-ended mutual funds typically reach maturity three to four years from the investment date.

  1. Early entry - Investing in an NFO allows you to get in on the ground floor of a new fund. This means you can benefit from the potential growth and performance of the fund right from the start. Being an early investor can be advantageous if the fund performs well in the long run.

  2. Low expense ratio - To attract investors towards the fund, NFOs often come with lower expense ratios than existing funds. A low expense ratio means you can keep a significant portion of your returns.

  3. Fresh portfolio - NFOs are typically launched with a new portfolio of securities. The fund manager selects securities based on the current market climate. This helps you take advantage of the prevailing market trends.

  1. Limited track record - NFOs lack a long-term track record of performance as they are new. Without historical data, evaluating the fund's potential to deliver optimum performance is challenging.

  2. Higher risk - The absence of a track record makes it difficult to assess the fund's ability to withstand volatility and economic downturns. You may be exposed to higher risks if the fund invests in niche sectors or adopts an unconventional investment strategy.

  3. Lock-in period - Some NFOs come with a lock-in period, which means you can’t redeem or sell your units for a certain period. The lock-in period could range from a few months to years. If you need liquidity within that period, it can be difficult.

  1. Accessibility - NFOs allow first-time investors or those with limited funds to participate in a fund from its inception. The minimum investment amount for NFOs makes them more accessible to more investors.

  2. Strong performance potential - As NFOs are launched in response to perceived market opportunities, they have the potential to deliver strong performance in their initial years. This can help you generate healthy returns and build wealth for various life goals.

  3. Diversification - NFOs often focus on niche sectors or investment strategies that may not be available in existing funds. Investing in an NFO can help you diversify your portfolio and reduce exposure to a single asset class. Diversification provides stability to your portfolio and helps improve long-term returns.

Before investing in an NFO, you should consider the following factors:

  1. Investment Objective: Evaluate the investment objective of the NFO to ensure it aligns with your financial goals. Understand the fund's strategy, risk profile, and asset allocation to determine its suitability for your investment portfolio.

  2. Fund Manager Expertise: Research the experience and track record of the fund manager responsible for managing the NFO. A skilled and experienced manager can significantly impact the fund's performance.

  3. Costs and Expenses: Assess the expense ratio and other costs associated with the NFO. High expenses can erode your returns over time, so comparing these charges with similar existing funds is essential.

  4. Risks and Potential Returns: Like any investment, NFOs carry certain risks. Study the risk factors mentioned in the offer document and analyze the potential returns vis-à-vis the associated risks.

  • Online Mode

You can actively invest in NFOs online through your Demat and Trading Account. Additionally, mutual fund platforms enable you to invest in NFOs, allowing you to conveniently buy and sell units from anywhere you like. These platforms assist in selecting open NFOs and placing your order to invest in them.

  • Offline Mode

You can invest in NFOs through a mutual fund distributor or broker. The mutual fund broker assists you in filling out all the relevant forms and submitting the necessary documents when you invest in the NFO. If you prefer offline investing and seek information about the mutual fund launched through the NFO, consider investing in NFOs through a mutual fund broker.

Conclusion

NFOs allow you to participate in a new mutual fund scheme during its initial phase. While they offer unique investment avenues and potential benefits, investors must carefully evaluate the investment objective, fund manager expertise, costs, and risks associated with the NFO before investing.

Remember, thorough research and consultation with a financial advisor can help you make informed investment choices and construct a diversified portfolio that aligns with your financial objectives.

FAQs

An NFO refers to the launch of a new mutual fund scheme by an AMC, providing investors with an opportunity to invest in the scheme during its initial phase.

NFO units are typically offered at a fixed price, often called the net asset value (NAV), commonly set at Rs. 10 per unit. Investors can buy units at this predetermined price during the subscription period.

The maturity period of an NFO can vary from scheme to scheme. However, close-ended NFOs typically reach maturity after a specific period, often three to four years from the investment date.

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